Centre’s interest-free loan facility provides space for states to increase capital expenditure. Will they?

Source– The post is based on the article “Centre’s interest-free loan facility provides space for states to increase capital expenditure. Will they?” published in “The Indian Express” on 21st April 2023.

Syllabus: GS3 – Indian Economy – Fiscal Policies

News– 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.

What are changes made by the central government in case of off-budget borrowings by states?

State governments’ off-budget borrowings were earlier not subject to strict oversight by the Centre. This allowed states to push some borrowings off-budget.

However, as per guidelines issued by the Centre in 2021-22, incremental off-budget debt for the year would need to be adjusted over four years between 2023-2026.

Further, off-budget borrowings after this period would be considered as borrowings made by the state itself.

What are the provisions made by the central government in case of interest free capex loans?

The Centre has 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.

There was back-ended utilisation of the capex loan in 2022-23. 30% of the total amount for 2022-23 was disbursed to states in March. So, the Union government seems to have tightened the guidelines for the scheme.

Around two-thirds of the capex loan will be untied in nature, and it will be released in instalments.

Why has the central government changed the provisions related to interest free capex loans?

Centre intends for these funds to supplement, not finance budgeted capex. Recent years have seen lower-than-budgeted capital spending by many states.

The increased allocation for the interest-free capex loan scheme would support state governments in funding their capital spending this year.

The full utilization of these funds by states will cover the impact of the scheduled reduction in the borrowing limit and drop in the GST compensation.

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.

What are issues with state fiscal public finances?

There is a divergence in states’ actual monthly borrowings against the indicative amount. So, it is difficult to gauge their underlying fiscal health. This suggests that states are unable to project their borrowing requirement accurately in advance.

States’ ability to scale up execution will be critical to ensure the full utilisation of the capex loan. Spending patterns may be influenced by assembly elections in states.