5 min readApr 21, 2023 09:04 AM IST
First published on: Apr 21, 2023 at 07:30 AM IST
In recent months, there have been two significant developments relating to state governments’ finances. First, a moderation in state governments’ off-budget borrowing, and second, better than expected utilisation of the funds under the central government’s capex loan scheme.
State governments’ off-budget borrowings were earlier not subject to strict oversight by the Centre. This allowed states to push some borrowings off-budget, effectively circumventing their fiscal deficit constraints. However, guidelines issued by the Centre in 2021-22 warranted that incremental off-budget debt for the year would need to be adjusted over four years between 2023-2026. Further, off-budget borrowings made thereafter would be considered as borrowings made by the state itself for the purpose of the Centre issuing its consent under Article 293(3) of the Constitution of India.
As a consequence of these steps, in February, the central government estimated a sharp drop in the off-budget debt of the states for 2022-23, driven by Telangana and Kerala. Considering that off-budget debt had risen sharply in recent years, and had raised concerns over-servicing, this decline is a welcome outcome.
In another positive development, the Centre released Rs 812 billion to states under the “Special Assistance as Loan to States for Capital Expenditure” scheme (interest-free capex loans) in 2022-23. This is higher than the amount indicated in the Centre’s revised estimates.
For the ongoing year, the Centre has further enhanced the allocation under the interest-free capex loan to the states to Rs 1.3 trillion. This loan is over and above the normal borrowing limit for the year and we assess it to be equivalent to 0.4 per cent of the GSDP for the year. The increased allocation for the interest-free capex loan scheme would support state governments in funding their capital spending this year. The full utilisation of these funds by states will also cushion the impact of the scheduled reduction in the borrowing limit as well as a drop in the GST compensation grants to an extent.
Taking into consideration the back-ended utilisation of the capex loan in 2022-23 — a sizeable 30 per cent of the total amount for 2022-23 was disbursed to states in March — the Union government seems to have tightened the guidelines for the scheme. While around two-thirds of the capex loan will be untied in nature, it will be released in instalments. Our interpretation of the revised tighter guidelines is that the Centre may be intending for these funds to supplement, not finance, budgeted capex or help to ensure that a minimum capex target is completed. After all, recent years have seen lower-than-budgeted capital spending by many states.
However, states’ ability to scale up execution will be critical to ensure that they fully utilise the capex loan. Spending patterns may be influenced by assembly elections in states such as Karnataka, Telangana, Rajasthan, and Madhya Pradesh over the course of the year. Faster identification of projects under this scheme could result in a less back-ended disbursement of funds. This will also have a bearing on the borrowing requirement of states.
Considering that the data so far indicates a divergence in states’ actual monthly borrowings against the indicative amount, it is difficult to gauge their underlying fiscal health. Borrowings by states were lower than indicated in February, which may have been on account of substantial central tax devolution in that month along with some GST compensation grants.
However, despite the back-ended release of the interest-free capex loans in March, actual market borrowings by states in the month exceeded the indicated amount. This suggests that states are unable to project their borrowing requirement accurately in advance — something that bond market participants will have to keep in mind.
In the weeks thereafter, there has been a lull in state borrowings. State governments have borrowed only 40 per cent of the indicated amount for the first three weeks of April. Considering that states borrowing ceilings are set to decline to 3 per cent of GSDP from 4 per cent in 2021-22, how states manage their borrowings now will be interesting to watch. The reduction in GST compensation as well as the borrowing limit would limit the resources available to states for funding their deficits now, making it all the more beneficial for them to fully utilise the capex loan scheme.
The writer is Chief Economist, Head-Research & Outreach, ICRA
Aditi Nayyar writes: In another positive development, the Centre released Rs 812 billion to states under the “Special Assistance as Loan to States for Capital Expenditure” scheme (interest-free capex loans) in 2022-23. (Express illustration/File) 
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