Centre may add riders to a third of Rs 1 trillion capital expenditure loan to states

The Centre may attach some conditions for the release of a part of the 50-year interest free loans to state governments for their capital expenditure.

In the Budget for FY23, finance minister Nirmala Sitharaman announced Rs 1 trillion support to states to ensure that capex momentum is not lost due to a likely paucity of funds after discontinuation of revenue cover for the Goods and Services Tax (GST) effective July 1, 2022.

The capex support is seen to be sufficient to cover any shortfall in states’ GST revenues in FY23 from the protected level. The support will be over and above their borrowing limit of 4% of Gross State Domestic Product (GSDP).

“Some 65-70% of the assistance (interest-free loan for capex) to states will be provided to them for projects identified by them, without any conditions. The balance 30-35% will be linked to specified reforms and other fiscal achievements,” an official source said.

The funds to be allocated amongst the states will be in proportion to their share of central taxes as per the award of the 15th Finance Commission, he added.

“States have been asked to remain project-ready given that amounts to be disbursed are substantial and their spending capacity needs to be ensured. The Centre wants to disburse the funds to states as early as possible so that capex deployment is not delayed,” another official said. Project-readiness is important as the funds will be transferred against individual projects, not as lumpsum amounts, he added.

“Since the funds are for meant for capital expenditure, I don’t think there is any need for further restrictions (on their release),” said N R Bhanumurthy, vice-chancellor at Bengaluru Dr B R Ambedkar School of Economics University.

While the ‘reforms’ to be linked to the special capex assistance to states are still being finalised for FY23, sources indicated these could include steps on monetisation of assets, town planning schemes, etc. “Our stand on (the conditions) will depend on what kind of reforms are being stipulated,” a senior Kerala government official said.

Out of Rs 15,000 crore earmarked for 50-year interest free special assistance to states for FY22, the Centre had initially stipulated in order for a state to be eligible for a third of its share, it has to monetise/recycle infrastructure assets and divest its stakes in state public sector enterprises. However, these found no takers as states pointed out that they have limited scope in asset monetisation and disinvestment. The Centre later removed these conditions and released the funds for projects identified by the states in FY22.

The Centre reckons that capital expenditure creates employment, especially for the poor and unskilled, has a high multiplier effect, enhances the future productive capacity of the economy, and results in a higher rate of economic growth.

The driving consideration for such a huge provision of capex through states is that the Centre alone may not be able to spend on asset creation as much as required. Also, the projects which the Centre takes up — railway, road, telecom etc — are not necessarily dispersed across the country in an even manner.

The Centre’s Budget capex for the next fiscal is pegged at Rs 7.5 trillion, up 36% from the revised estimate for the current year even though its total expenditure is budgeted to grow by a very modest 4.6%, signifying a desire to improve ‘quality’ of spending.

The Centre had permitted states to undertake conditional net market borrowing of 1% of GDP each out of 5% and 4.5% of GDP set for FY21 and FY22, respectively. The objectives were to aid states to bridge the resource gap due to adverse impact of Covid-19 and improve quality of expenditure.

For FY22, 50 bps of borrowing ceiling was linked to meeting capex targets while another 50 bps was earmarked for states that improve their power distribution firms’ corporate governance and cut pilferage in power supplies. For FY23, the states can borrow up to 4% of GSDP of which 0.5% will be tied to improving the health of power discoms.

Further, state-owned PFC-REC started implementing a Rs 1.35 trillion loan package during FY21 for discoms, a big chunk of which was linked to implementation of reforms such as liquidation of dues and subsidies by state governments, installation of smart meters, improving operational and financial efficiency etc.