Why states are falling short on capital spending

Source– The post is based on the article “Why states are falling short on capital spending” published in the “The Hindu” on 30th June 2023.

Syllabus: GS3- Government budgeting

Relevance- Issues related to government finances

News- Today, Indian states are at the forefront when it comes to capital expenditure. Aware of this, the Centre has been incentivizing them in a big way. But the outcome is far from optimal.

What’s the importance of capex?

Capex creates assets. These improve the efficiency of the economy. A capital expenditure on port will speed up transportation of goods and people. It will reduce logistics costs.

They contribute to future economic growth. A factory set up today will create jobs and its output will add to the gross domestic product in future.

Revenue expenditure does not create any asset and contributes to present growth.

Who should be spending on capex?

Ideally the bulk of the capex should be done by the private sector. Government should play a supportive role. However, the private sector in India is reluctant to invest in capex.

As a result, the government is investing heavily for capex with the hope that it will trigger private investment.

Here the states have come to play a larger role as their combined capex spending is more than that of the Centre. In FY22 states spent ₹10.5 trillion on capex compared to the Centre’s ₹8.4 trillion.

How are states being encouraged to spend more?

The Centre is offering states a 50-year interest-free loan for capex. In FY23 it approved ₹95,147 crore and for FY24, ₹1.3 trillion has been allocated under the scheme.

The Centre has also been releasing tranches of tax devolution early to help states front-load capex rather than wait till the end of the fiscal.

How have states fared on capex?

According to a study by Bank of Baroda, 25 states have cumulatively achieved 76% of their capex target in FY23. They had budgeted ₹7.49 trillion and spent ₹5.71 trillion.

Karnataka, Sikkim, Arunachal Pradesh and Bihar exceeded their target. Jharkhand, Madhya Pradesh, Himachal Pradesh, Chhattisgarh, Tamil Nadu, Gujarat and Odisha spent over 80% of the budgeted amount.

Andhra Pradesh was the worst performer spending just 23% of allocated funds.

Why are states falling short despite support?

Firstly, states are legally mandated under the Fiscal Responsibility and Budget Management Act to keep their fiscal deficit under control.

States are unable to reduce their revenue expenditure on salaries, pension, subsidies. They are cutting down on capex to meet the deficit norms.

States are also constrained by a lack of projects or skills to implement them. There are state-level political disruptions such as government instability or elections which come in the way of decision-making pertaining to capex.