Increased Capital Expenditure by Indian states in 2024- States are spending

Source: The post Increased capital expenditure by Indian states has been created, based on the article “States are spending. The economy is waiting” published in “Indian express” on 20th January 2024.

UPSC Syllabus Topic: GS Paper 3 – Indian Economy and issues relating to planning, mobilisation of resources, growth and development.

Increased Capital Expenditure by Indian States, The article discusses how state governments in India veered towards the path of fiscal consolidation after the COVID-19 pandemic. They are now spending more on capital expenditure rather than just on regular expenses like salaries and pensions.

How State Governments Managed Their Finances Post-COVID-19?

1. Post COVID-19, state governments in India kept their fiscal deficits below 3% of GDP in 2021-22 and 2022-23, lower than the allowed limits of 4.5% and 4%.
2. States spend more than the central government, accounting for over 60% of total government expenditure.
3. In 2023-24, states (excluding Arunachal Pradesh, Goa, Manipur and Meghalaya) shifted focus to capital expenditure with a 45.7% increase, while regular expenses grew only by 9.3%.
4. The ratio of capital outlay to total expenditure hit an eight-year high of 14.1%, indicating more spending on productive assets.

What Increased Capital Expenditure?

Increased capital expenditure by Indian states is driven primarily by two factors:

First, proactive policies by the Union government, including the early release of tax devolution funds. In 2023-24, Rs 973.74 billion was approved, with Rs 590.3 billion disbursed for capital projects by November.

Second, states’ own revenues have shown robust growth. Tax and non-tax revenues grew by 11.5% and 19.5%, respectively. This indicates improved tax administration efficiency and economic formalization.

Thirdly, the state tax revenues outpacing nominal GDP growth, estimated at 8.9% according to the National Statistical Office’s First Advance Estimates, suggests two key aspects. Firstly, it reflects enhanced efficiency in tax administration by the states, indicating better collection and management of taxes. Secondly, it points to an increase in the formalization of the economy.

Additionally, significant revenue from the mining sector, boosted by reforms like e-auction of mining leases, contributed to this growth, particularly in mineral-rich states.

Here Are More Topics For Interest-

Recent Concerns with India’s Science Management in 2024

Agriculture and Stocking Policy in India in 2024

What are The Challenges?

1. Overall revenue receipts grew by only 5.5% due to a 29.2% reduction in grants from the Union government.
2. States increased market borrowings to a record Rs 5.8 trillion in nine months, mainly for capital expenditure.
3. States might slightly exceed their fiscal deficit target of 3.1% of GDP, potentially reaching up to 3.3 – 3.4%.

Question for practice:

Examine the factors and challenges associated with the increased capital expenditure by state governments in India following the COVID-19 pandemic.