Post-pandemic spending for recovery

First, the revenue receipts of these states have expanded by 8.6 per cent to Rs 18.5 trillion in 2021-22 (April to December), up from Rs 17.1 trillion over the same period in 2019-20. States have benefited from robust revenues even as transfers from the Centre have undergone a mild dip in this period.

Second, with states’ revenue spending rising at a faster pace (13.9 per cent), their revenue deficit has doubled to Rs 1.9 trillion from Rs 0.9 trillion in the pre-Covid period. In comparison, the Centre’s revenue deficit shrank to Rs 4 trillion from Rs 7.1 trillion, while remaining much larger in absolute terms. Third, states have also witnessed an encouraging expansion in capital spending, driven primarily by eight states — Andhra Pradesh, Madhya Pradesh, Nagaland, Punjab, Rajasthan, Tamil Nadu, Telangana and Uttar Pradesh. However, states such as Gujarat, Haryana, Jharkhand, Odisha and West Bengal have recorded a decline in capital spending during this period compared to their pre-Covid levels.

Despite the expansion in capital spending at the aggregate level, however, spending in the first nine months of the year stood at only a modest 48 per cent of the 2021-22 budget target of Rs 5.9 trillion. Now, actual capital spending in recent years has tended to be restricted to around three-fourths of the aspirational budget target. If this trend continues, it would imply an outgo of Rs 1.6 trillion in the fourth quarter (January-March) of this year. This figure is lower than the amount recorded in the last quarter of three of the last four years — 2017-18, 2018-19, 2019-20 and 2020-21. However, despite being low, this appears realistic as elections in some key states in the ongoing quarter may compress actual spending relative to the trend seen in recent years.

Turning our attention to the coming financial year, 2022-2023 marks the transition to the post-GST compensation era, with the five-year compensation period set to end on June 30, 2022. While we expect compensation of around Rs 1.2-1.5 trillion (including pending dues for this year and regular flows for February-June 2022) to flow to the states in 2022-2023, it would be half the magnitude of the compensation that the states received this year. This decline, followed by an expected cessation in FY2024 after the compensation period has ended, is set to pose a structural challenge to those states that have a higher dependence on GST compensation.

A consequence of this adjustment was a feared curtailment of capital spending by states in the quarters ahead. However, the Centre has sharply ramped up the size of the interest-free 50-year loan to states for capex to Rs 1 trillion in its budget, up from Rs 0.15 trillion in 2021-22. This may prevent states from cutting back on capital expenditure.

At present, the conditionalities surrounding such loans and the end-uses of these funds are not available in the public domain. Different states have different capex priorities given the status of their infrastructure. This could impact their interest in availing of these loans. While the relatively long tenure of 50 years makes it an attractive source of funding, some states may argue that they would have preferred the sum as an untied grant, albeit intended for capex. It will be interesting to see how many states end up availing this facility. This will have a crucial bearing on the pace of investment activity next year, especially in the first half of the year, a portion of which may remain in the shadow of heightened geopolitical conflicts.

This column first appeared in the print edition on March 8, 2022 under the title ‘Spending after pandemic’. The writer is chief economist ICRA.