Opinion Why states should spend more

As per this data, in 2022-23, capital expenditure by these states stood at Rs 6.1 trillion. This is Rs 0.9 trillion lower than the capex budgeted for that year. However, the gap has narrowed — it was Rs. 1.1-1.4 trillion during 2020-22. Moreover, the combined capital expenditure of these states has now increased to an all-time high.

This spending by states may have benefited from the capex thrust of the central government through its interest-free capex loan scheme, which saw a five-fold increase to Rs 812 billion in 2022-23. Details on the sectoral break-up of such projects are not available. Typically, states’ capital spending tends to be concentrated in sectors such as transport, irrigation, water, supply and sanitation, and urban development. We believe projects closer to completion are likely to have been put up for funding under this scheme by the state governments.

A sizeable portion of these loans is expected to have been devolved to the 24 states last year itself. Excluding these loans, the pace of growth of the balance capital expenditure of these states is likely to have eased to a modest 6 per cent last year, from 24 per cent the year before.

However, capital spending by states continued to be back-ended, with as much as 47 per cent being spent in the last quarter of the year. Moreover, even the Centre’s capex loan was disbursed nearly equally in the third and fourth quarters. Though approvals for projects under this scheme commenced in July 2022, the onset of the monsoons may have delayed the actual execution of the approved plans.

The data also shows that the combined fiscal deficit of these 24 states stood 20 per cent lower than what was indicated in their budgets — at Rs 6.6 trillion as against the indicated Rs. 8.2 trillion. This would suggest that states have managed to bring down their fiscal deficits sharply over the years — from 4.1 per cent of GSDP in the pandemic-beleaguered FY2021 to a highly respectable 2.6 per cent of GSDP in FY2023.

Data on usage patterns of various liquidity facilities provided by the Reserve Bank of India to the states helps reveal stress experienced by the states over the course of the year. In 2022-23, there was an overall decline in the frequency of usage of the Ways and Means Advances and the overdraft facility by the states. However, Andhra Pradesh, Telangana and a few northeastern states continued to tap these facilities for a large number of days suggesting that they may have been experiencing periods of tight liquidity. Interestingly, the use of the special drawing facility, a collateralised window, increased last year. We believe this was led by the attractive spread relative to the weighted average cost of the state government securities.

Coming back to the capex loan scheme, out of the budgeted allocation of Rs 1.3 trillion for this year, the central government has already approved a sizeable Rs 564 billion to 16 states as on June 26. Additionally, it has also released two tranches of tax devolution totalling Rs 1.2 trillion in mid-June. These developments should serve to ease the states’ liquidity situation, encourage a quicker pick up in their capex spending, and perhaps create the fiscal space for states to spread their capital spending evenly throughout the year.

The writer is Chief Economist, Head- Research & Outreach, ICRA