More capex for states

Source: The post is based on the article “More capex for states: Higher Central funds for states’ capital outlay are welcome, but these should lead to additionality” published in Business standard on 26th July 2023.

Syllabus: GS3- Indian economy – resource mobilization

News: In this article author discusses how India’s finance minister, Nirmala Sitharaman, has increased government’s capital expenditure over the years. However, some Indian states are not increasing their spending as much as expected, despite receiving more money from the central government. The author suggests this might be because states are using the extra money for other expenses, not for new projects.

About Government’s Capital Expenditure

Central Government’s Capital Expenditure

Steady rise over years: 1.67% of GDP in 2019-20 to 3.3% in the current year.

Last time it was over 3% of GDP was in 2004-05.

Aim: Upgrade infrastructure and boost private sector investment.

State Governments’ Capital Expenditure

Received ₹10,000 crore in 2021-22, by way of 50-year interest-free loan for capex, subject to the fulfilment of certain economic policy reforms by the state governments.

2022-23: States got ₹1 trillion of the total ₹7.5 trillion Central capex.

2023-24: States allocated ₹1.3 trillion out of ₹10 trillion.

Despite more funds, capital expenditure by states rose only 12% in 2022-23.

States with Increased Capital Expenditure:

Bihar: 29%, Chhattisgarh: 27%, Gujarat: 27%, Haryana: 17%, Jharkhand: 49%, Kerala: 13%, Maharashtra: 32%, Odisha: 45%, Tripura: 48%, Uttar Pradesh: 31%, West Bengal: 26%

States with Decreased Capital Expenditure:

Andhra Pradesh: 55%, Punjab: 17%, Rajasthan: 17%, Telangana: 38%, Assam: 20%, Nagaland: 18%

Singal digit growth in capital outlay – Tamil Nadu and Uttarakhand

Why did some states not spend more?

Covid pandemic reduced: States didn’t see the need for more capital projects to create jobs.

Shortage: Some states might have lacked executable projects or couldn’t handle more funds.

Misuse: Central support of ₹1 trillion might have been diverted. Instead of capital projects, states might have used it for other revenue schemes.

Financial strategy: States could use Central funds for capex targets and save their own resources for other plans. Example: Andhra Pradesh reduced capex by 55%.

What’s the concern for the future?

Slow Growth: Despite Central support, states’ capex growth was slow in 2021-22.

Unrealistic Projections: States project 37% growth in 2023-24, but past performance raises doubts.

Absorptive Capacity: States might lack the ability to effectively implement capital projects quickly.

Financial Jugglery: States might misuse Central funds, diverting them from capital projects to other schemes.