A Closer Look at the Rise in States’ Capital Expenditure

• Reduction in Off-Budget Borrowing:
  • Previously, state governments had the liberty to borrow off-budget without much scrutiny from the Central government.
  • However, during the fiscal year 2021-22, the Central government introduced regulations that necessitate the adjustment of any off-budget debt over a four-year period from 2023-2026.
  • The central government's forecast in February indicated a notable reduction in states' off-budget debt for the fiscal year 2022-23, which is a positive development.
• Effective Use of Capex Loan Scheme:
  • The Central government has disbursed more funds to the states than initially projected under the “Special Assistance as Loan to States for Capital Expenditure” scheme, with a provision of Rs 812 billion in 2022-23.
  • Moreover, the allocation under the interest-free capex loan to the states has been increased to Rs 1.3 trillion for the ongoing year, which is expected to boost their capital expenditure.
• Back-Ended Utilization of Capex Loan:
• • In 2022-23, the Union government has tightened the guidelines for the capex loan scheme due to its back-ended utilization.
  • Approximately two-thirds of the loan will be untied, but will be disbursed in installments.
  • The loan may be utilized to augment budgeted capex or to ensure that a minimum capex target is achieved, rather than completely financing it.

The Need for States to Enhance Execution Capabilities:

• For states to make the most of the capex loan, it is crucial to improve their capacity to execute projects.
• Faster identification and initiation of projects could lead to a more balanced disbursement of funds, which in turn could influence the borrowing requirements of states.

Discrepancy in States’ Actual Monthly Borrowings:

• The data indicates that states’ actual monthly borrowings deviate from the estimated amount, making it difficult to gauge their fiscal health.
• Despite the disbursement of interest-free capex loans in March, states borrowed more than the projected amount.

Conclusion:

• It will be intriguing to observe how states manage their borrowings as their borrowing ceilings are anticipated to decrease.
• This is particularly significant as the decrease in GST compensation and borrowing limit will constrain the resources available to states to finance their deficits.
• Hence, it is crucial for states to maximize the use of the capex loan scheme.

Understanding the Rise in States’ Capital Expenditure [UPSC Notes]:- Download PDF Here