As many as 12 of 17 states in the Reserve Bank of India’s non-special category grew faster than the 6.7% pace the national economy clocked in fiscal 2018, CRISIL said in its report titled ‘States of growth 2.0’ released today.

However, this growth hasn’t been equitable. Low-income states have not sustained high growth long enough to meaningfully bridge the per-capita income gap with the high-income states. In fact, the chasm is widening.

Moreover, growth has not quite been conducive to job creation in a majority of the states. That’s because 11 states have recorded lower growth in ‘employment-intensive’ sectors such as manufacturing, construction and trade, and hotels transport and communication services, compared with the national rate.

On the fiscal front, most states veered off the Fiscal Responsibility and Budget Management Act (FRBM) line.

Despite this, due to little fiscal legroom for the Centre and increased share of states in central transfers, states are now the new engines of public spending.

Says Dharmakirti Joshi, Chief Economist, CRISIL Ltd, “Indeed, states appear to have taken the baton from the Centre in terms of spending – especially capital expenditure – in recent years. This has become more relevant after the 14th Finance Commission increased allocation of funds to states and gave them the leeway to prioritise spending as per need. Nearly two-third of the capex in the economy now is being incurred by the states.”

Although Uttar Pradesh, Karnataka and Bihar were the biggest spenders overall, Rajasthan, Jharkhand, Uttar Pradesh and Telangana topped the list of states that spent the most out of their budget on capex.

However, the spending is not as much as they ought to be in health and education.

Says Dipti Deshpande, Senior Economist, CRISIL Ltd, “States must also be wary of their debt profiles. While the FRBM Act had helped states recover their fiscal health considerably, recent trends show they are slipping. Debt ratios have risen in many states – with the assimilation of Ujwal Discom Assurance Yojana (UDAY), farm loan waivers, and Pay Commission hikes.”

The debt ratio was over 30% in Punjab, Rajasthan and Kerala, while Chhattisgarh, Maharashtra and Karnataka managed to keep it relatively low.

For most states, an increase in the primary deficit (which captures the current fiscal stance of the government) was the major cause of the rise in the debt ratio. Therefore, states must focus on improving their primary account balance, which would require relentless efforts to shore up tax revenue.

CRISIL’s previous ‘States of growth’ report, brought out in January 2018, focussed on GDP growth, inflation and fiscal health of states between fiscals 2013 and 2017. The latest version focusses on how macroeconomic performance evolved in fiscal 2018, and offers insights on expenditure patterns, quality of spending, and fiscal sustainability. States are also benchmarked against national trends in key metrics, which have yielded interesting contrasts.