Build up to Budget 2022-23: Expenditure push for states to be theme

Funding patterns for certain Centrally-sponsored schemes (CSS) and borrowing by states might see a tweak, with the Centre pushing for more spending by states.

“The Budget thrust will be more about execution and delivery of the existing reforms and capex rather than focussing on new schemes altogether. In election states of Uttar Pradesh, Manipur and Punjab, greater focus is being put on road and railways and health projects while some port sector related investments and decisions will benefit Goa,” a government official said.

Finance Minister Nirmala Sitharaman has held a series of meetings with top officials from the road and railways Ministries prior to the Budget. In the current fiscal’s Budget, the government had announced major national highways works in Tamil Nadu, West Bengal, Kerala and Assam.

The total outlay for Ministry of Road Transport and Highways has been pegged at Rs 1.18 lakh crore for this year, but spending in this sector is expected to be higher in the revised estimates, with the government targeting nearly 30 per cent expansion next year.

Expenditure by states, especially on investment and infrastructure, is likely to take precedence in the Budget. “Revenue growth is a concern for states. Now with another wave of Covid coming in and restrictions being imposed by states, the recovery requires another push from spending more. For that, states are expected to get some tweaks to funding patterns and borrowing in order to have more funds to spend,” an official said.

For states that meet the capital expenditure plans, the incentive scheme allowing them additional borrowings of 0.5 per cent of GSDP (Gross State Domestic Product) is expected to continue.  The government had made a provision for a total of Rs 2 lakh crore for states and autonomous bodies towards their capital expenditure.

Many states have already raised concerns over revenues, especially in the context of the assured compensation mechanism under the Goods and Services Tax regime coming to an end in June this year. “GST compensation will come to an end and then many states would require additional funds as Covid has affected revenue growth already,” the official added.

States in their pre-Budget meeting last month had urged the Central government to consider increasing its share in CSS and an extension of compensation for another five years. States argued that the Centre’s share in CSS should rise from the present level of 40-50 per cent in several schemes.

Under GST, states were guaranteed compensation at the compounded rate of 14 per cent from the base year 2015-16 for losses arising due to implementation of the taxation regime for five years since its rollout. West Bengal, Rajasthan, Delhi and Tamil Nadu were some states which had raised concerns over increasing the compensation period under GST and raising the share of the Union government in CSS.

States’ demands had come into focus recently when the GST Council called a meeting with the single agenda of reconsideration of a rate hike for textiles. The Council had decided to defer the proposed hike in tax rate for the textiles sector to 12 per cent from 5 per cent, which was to be implemented from January 1, based on representations by some states including Gujarat.

More spending and more disposable income to incentivise consumption are likely to find focus in the Budget. Last November, the Centre held a meeting with states to discuss measures to incentivise expenditure, growth and investment. The Finance Ministry announced the advance of an instalment of tax devolution to states, in addition to the one to be given in November.  This helped in improving cash flow for Andhra Pradesh, Tamil Nadu, Sikkim and Manipur, which had negative cash balances as of October 30.

The front-loading of tax devolution was aimed at helping states in meeting their expenditure needs amid lower revenues. At present, 41 per cent of tax collected is devolved in 14 instalments which gives predictability of cash flows to states. On Thursday, the Centre authorised release of another advance instalment of Rs 47,541 crore of tax devolution to states, in addition to the regular monthly devolution for January 2022. States, therefore, received Rs 95,082 crore in January 2022.

Speeding up the National Infrastructure Pipeline, with an estimated investment of Rs 111 lakh crore over a five-year period till 2025, is another avenue where the government is looking to step up investments — both at the Centre and state levels. As per industry estimates, less than 5 per cent of the projects under NIP have been rolled out till mid-November.

As the government looks towards a greater focus on spending, a push towards consumption demand has also been central to discussions.

“After a gap of two years, the Indian economy will show a meaningful expansion, as the real GDP in FY23 will be 9.1 per cent higher than the FY20 (pre-Covid level) GDP level. However, the size of the Indian economy in FY23 will be 10.2 per cent lower than the FY23 GDP trend value. A continued weakness in private consumption and investment demand is estimated to contribute 43.4 per cent and 21.0 per cent, respectively, to this shortfall,” Fitch-group company India Ratings said in its Economic Outlook for FY23.

Concerns about inflation are also weighing on discussions surrounding the Budget, with it getting entrenched more due to the supply-side factors, and the government may look at taking steps towards easing those constraints. The retail inflation rate rose to a six-month high of 5.59 per cent in December, while wholesale inflation, which reflects prices at producers’ end, stood at 13.56 per cent in December.