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The Centre is likely to renew its thrust on capital expenditure in the upcoming Budget, buoyed by some visible traction in capex spending by states late in the current financial year. After remaining muted for the first seven months of 2022-23, capital spending by states has seen a sharp pickup in November, with 18 major states — including Gujarat, Karnataka, Jharkhand, Uttar Pradesh, Bihar and Odisha — posting a 49.7 per cent year-on-year increase at Rs 44,647 crore. For the financial year so far till November, these 18 states have seen a rise of 5.7 per cent in their capital expenditure to Rs 2.44 lakh crore, primarily on account of the sharp pickup seen in November, according to official data.
Capital expenditure by these 18 states in November accounts for 18.3 per cent of the overall capital spending during April-November. Capex by states such as Gujarat, Karnataka, Jharkhand, Uttar Pradesh has more than doubled in November as against the corresponding period last year. For states such as Odisha, the rise in capex is nearly five-fold, while for Bihar, it is an over three-fold increase in November.
Experts said better certainty for states’ revenue flow in terms of growth in tax collections and devolution from the Central pool has worked in favour of higher capital expenditure by states. Among the states with the highest level of capital expenditure, Uttar Pradesh has seen an increase of 6.6 per cent at Rs 35,658 crore during April-November this fiscal and over 125 per cent increase in November to Rs 9,819 crore. Capex by Gujarat rose 44.3 per cent in April-November to Rs 20,399 crore and by 118.3 per cent in November to Rs 2,129 crore. Capex by Maharashtra increased by 9.2 per cent to Rs 19,310 crore during April-November, but declined from the year-ago level in November by 5.6 per cent to Rs 3,253 crore.
Bihar’s capital spending increased by 46 per cent in April-November to Rs 14,290 crore and by over 400 per cent in November to Rs 5,116 crore, while Odisha’s capex rose to Rs 5,046 crore in November as against Rs 1,015 crore last year.
Some states have recorded a decline in capital expenditure during April-November including Andhra Pradesh, Punjab, Madhya Pradesh, Tamil Nadu, Telangana and Uttarakhand. Capex by Andhra Pradesh declined by over 30 per cent to Rs 6,188 crore in April-November from Rs 9,199 crore in the year-ago period, while in November it declined to Rs 312 crore from Rs 460 crore. Tamil Nadu’s capex has declined by 11 per cent to Rs 18,287 crore during April-November and by 48 per cent in November to Rs 2,126 crore, according to official data.
Greater certainty for states of their revenue flows and devolution from the central pool are likely triggers for higher capital expenditure. This comes at a time when the RBI has nudged states to mainstream capital expenditure planning rather than treating them as “residuals and first stops” for cutbacks in order to meet budgetary targets.
Earlier this month, the Reserve Bank of India had in a report asked states to mainstream capital expenditure planning rather than treating them as “residuals and first stops” for cutbacks in order to meet budgetary targets. Capital spending by states grew by just 0.9 per cent in April-October 2022, which RBI said partly reflects the tendency to back-load expenditure in the latter half of the year.
“It is worthwhile to consider creating a capex buffer fund during good times when revenue flows are strong to smoothen and maintain expenditure quality and flows through the economic cycle,” the RBI report on State Finances: A Study of Budgets of 2022-23 had stated, while outlining likely reversion to the old pension scheme by some states as a major looming risk.
“States have better revenue visibility as they gain on higher revenue collections. States’ own revenues have been good and so has been the devolution amount by Centre helping instill confidence in states to spend more on capital expenditure. The government is now adjusting borrowing of state public sector enterprises of FY22 as against the earlier proposal for FY21 and FY22, helping them expand the fiscal threshold. In the earlier proposal the overall borrowing limit of many states would have reduced and with sticky expenditure, interest payments, salary and pension would take precedence and spending on capex was slow. As the year goes by, they will look at what kind of exemptions are made by the central government and capex spend might sustain,” Devendra Kumar Pant, Chief Economist, India Ratings said.
Revenue receipts of most of these 18 states have reached halfway of the targets outlined in their budgets for 2022-23 in the first eight months of the fiscal. In August and November each, the Centre released advance installment in addition to the regular monthly installment of tax devolution to states helping ease fiscal pressure of states. Recent instructions by the central government allowing states to include off-budget borrowing for previous financial years in their annual borrowing are also aiding states to better manage their fiscal math. The borrowing limit for states is fixed at 3.5 per cent of GSDP with an additional 0.5 per cent linked to power sector reforms.
In June 2022, the Department of Expenditure under the Union Finance Ministry had allowed adjusting of off-budget borrowings only for FY22, instead of FY21 and FY22, spread over a time period of four years (2022-23 to 2025-26). “While fixing the net borrowing ceiling of the states for the year 2022-23 in March 2022, it was decided and communicated to the states that borrowings by state public sector companies/corporations, special purpose vehicles and other equivalent instruments, where principal and/or interest are to be serviced out of the state budgets and/or by assignment of taxes/cess or any other state’s revenue, shall be considered as borrowings made by the State itself…it has been decided and communicated to the States in June 2022 that off-budget borrowing done by the states upto the year 2020-21 may not be adjusted. Further adjustment on account of off-budget borrowing done by the States in 2021-22 is to be done over upto four years (2022-23 to 2025-26),” it had said.
