Centre’s State Capex Scheme Should Gather Pace Post-Monsoon
Both the union as well as state governments have budgeted for a massive increase in capital spending in the 2022-23 financial year. Outcomes are decidedly mixed at the beginning of the year. With the bulk of the step-up in the Government of India’s capex by way of loans to state governments, the fortunes of both are tied to how quickly states can ramp up their capital spending in the coming months.
The Spends So Far
Budget 2022 pegged the on-budget capital expenditure of the centre at Rs. 7.5 lakh crore in the budget estimates for FY23. This implies a robust year-on-year growth of 27% relative to the provisional actuals of Rs. 5.9 lakh crore for FY22.
In addition, the combined capex of 26 states (excluding Assam and Goa, whose FY22 provisional actuals are not available) is budgeted to expand by an impressive ~36% to Rs. 6.8 lakh crore in FY23 relative to their provisional actuals of Rs. 5.0 lakh crore for FY22. Nearly 72% of the Rs. 1.8 lakh crore incremental capital outlay is led by Uttar Pradesh, Maharashtra, West Bengal, Odisha, Andhra Pradesh and Haryana.
A caveat is in order; variance analysis of past years suggests that some of these states tend to over-budget their capex.
Interestingly, two-thirds of the budgeted step-up in the centre’s capex for FY23 is by way of a loan to the state governments, which is earmarked for capital spending. The scheme for special assistance to states for capital investment had first been launched by the Government of India in October 2020, as part of the measures to support economic activity which had been negatively impacted by the Covid-19 pandemic. In FY21, the centre had announced spending of Rs. 12,000 crore under this scheme, against which it released Rs. 11,800 crore in that fiscal.
In the budget for 2022-23, the centre had stepped up the allocation towards this scheme to Rs. 1 lakh crore for the current fiscal from Rs. 14,200 crore in FY22. Importantly, this substantial amount of Rs. 1 lakh crore would be given to the states as an interest-free loan for 50 years, and would be over and above the normal borrowing ceiling fixed by the Government of India for FY23.
Surprisingly, not all states have included the estimated inflows from the capex scheme in their respective FY23 budgets, although this does not preclude them from receiving these funds over the course of the year.
Moreover, the disaggregated data of the central government pegs the capital transfers to states at a subdued Rs. 1,000 crore in April-May 2022, suggesting that the expanded scheme had not yet taken off.
Adequate Enablers For States To Maximise Scheme Use
The guidelines for the usage of the funds under the capex scheme permit states to settle their pending bills for the ongoing capital projects in addition to using them for new and ongoing capital projects that are duly approved by the centre. The scheme for FY23 is divided into seven parts. The bulk of the total, or Rs. 80,000 crore has been earmarked under Part-I of the scheme, which does not have a sectoral end-use specified for the capital spending. This is enthusing, as it suggests that states can utilise the funds for their own disparate capex priorities, which should ideally hasten the takeoff of this scheme in the ongoing quarter.
Under Part-I of the scheme, funds for approved projects are to be released in two instalments. Half of the approved amount will be released upfront after the list of projects is approved. The balance will be released after a utilisation certificate of at least 75% of the first instalment is provided. Execution of capital projects typically witnesses a slowdown during the monsoon months. Accordingly, the second instalments may only be released in H2FY23.
Additionally, under Part-I of the scheme, funds will be allocated to the states in the proportion of their share in central tax devolution (inter-se) fixed by the 15th Finance Commission for its award period FY22-26. Accordingly, Uttar Pradesh, Bihar, Madhya Pradesh and West Bengal will account for 43% of the allocation of Rs. 80,000 crore for FY23.
It will be interesting to see whether the states eligible for a large share of funds are able to utilise the same, or if they end up being reallocated to other states that may have more pressing requirements and/or shovel-ready projects.
In our view, in the prevailing rising interest rate environment, it makes economic sense for states to avail of interest-free borrowing from the centre for fresh capital spending and/or clearing pending bills. Such funding assumes particular importance, given the ongoing concerns around the extent of reduction in the FY23 state-wise borrowing limit based on the adjustment of off-budget borrowings for FY23, as well as the end of the five-year GST compensation period.
Aditi Nayar is Chief Economist at ICRA Ltd.
The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.