Increase in States' Capital Expenditure [UPSC Notes]

Two important developments have taken place in recent months in the finances of state governments. One is the reduction in off-budget borrowing and the other is the better utilization of funds under the union government’s capex loan scheme. This is an important topic for the IAS exam GS-3 segment.

Increase in States’ Capital Expenditure

• Moderation in Off-Budget Borrowing:
  • Before, state governments could borrow off-budget without much oversight from the Centre. 
  • However, in 2021-22, the Centre introduced guidelines that required any off-budget debt to be adjusted over four years from 2023-2026. 
  • The central government predicted in February that there would be a significant decrease in off-budget debt for states in 2022-23, which is good news.
• Better Utilization of Capex Loan Scheme:
  • The Centre gave more money to the states than originally estimated under the “Special Assistance as Loan to States for Capital Expenditure” scheme, providing Rs 812 billion in 2022-23. 
  • Additionally, the Centre increased the allocation under the interest-free capex loan to the states to Rs 1.3 trillion for the current year, which would help fund their capital spending.
• Back-Ended Utilization of Capex Loan:
• • In 2022-23, the Union government has made the guidelines for the capex loan scheme stricter due to its back-ended utilization.
  • Around two-thirds of the loan will be untied but will be given in installments.
  • The purpose of the loan may be to supplement budgeted capex or ensure a minimum capex target is met, not finance it entirely.

States’ Ability to Scale Up Execution:

• It is important for states to increase their ability to execute projects in order to fully use the capex loan. 
• Identifying projects faster could result in funds being disbursed more evenly, and this could impact the borrowing needs of states.

Divergence in States’ Actual Monthly Borrowings:

• The data shows that states’ actual monthly borrowings differ from the estimated amount, which makes it hard to determine their fiscal health. 
• Even though the interest-free capex loans were released in March, states borrowed more than the estimated amount.

Conclusion:

• It will be interesting to see how states manage their borrowings as their borrowing ceilings are set to decline. 
• This is especially important since the reduction in GST compensation and borrowing limit will limit the resources available to states for funding their deficits. 
• Therefore, it would be beneficial for states to fully utilize the capex loan scheme.

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