Centre to front load Rs 95,082 crore to states in two installments

Two instalments – of Rs 47,541 crore each – together instead of one will be released to states on November 22, union finance minister Sitharaman said on Monday, after a marathon meeting with chief ministers, state finance ministers and officials on scaling up investments in infrastructure and growth, which in turn will spur employment opportunities.

States are entitled to 41% of central taxes as per the Finance Commission formula, which is devolved in 14 instalments in a financial year.

“This being a very exceptional year, states will not be short of money in their hands when all of us are pushing forward with the infrastructure expenditure to be taken up by them,” she said.

Similar to goods and service tax compensation, which was agreed upon for this entire year and already given by early November, some chief ministers requested during the meeting for frontloading of a part of the tax devolution for the current financial year, in order to increase their capital expenditure, the finance minister said.

The first of its kind meeting was held to discuss key ideas with states to drum up further investments into the country at a time when the economy has sharply recovered post the second Covid wave with key indicators such as exports, manufacturing PMI and digital payments reaching pre-pandemic levels.

“We are seeing robust growth. However, it’s also a time when we are looking at ways in which we need to sustain the growth and take it as close as possible to double-digit growth and for which both the Centre and the states will have to work together,” Sitharaman said.

The Union Budget for 2021-22 has allocated a Rs 5.54 lakh crore capital outlay, an increase of 34.5% over the previous year. Additionally, around Rs 2 lakh crore has been allocated to states and autonomous bodies for their capital expenditure.

Finance secretary TV Somanathan said state cash balances were high at Rs 2.66 lakh crore as of October 31, and that front loading of the central tax devolution will give a further impetus to states to push up capex.

Between April and September 2021, capital expenditure of 20 states for which data is available shows a 79% increase over the pandemic year FY21 and 23% higher than the pre-pandemic year FY20, Somanathan said.

On a question on some opposition-ruled states not reducing value-added tax on petroleum products, Sitharaman said the Centre has already appealed to them on that. She added that GST would not get implemented on the products unless a rate of tax is decided by the GST Council.

On the recent cut in excise duty on petrol and diesel by the Centre, Somanathan clarified that the central government alone was bearing the revenue loss.

“An issue with regard to recent tax cut on petrol and diesel was also raised and states have been told that the entire reduction was in the non-sharable portion of the revenues. It is a revenue loss for the Centre and there is no loss of revenue for the states,” he said.

Centre’s suggestions

The finance minister said potentially monetisable assets in states that have been left out of the National Monetization Pipeline – which includes only central government assets – can be leveraged to enhance the capital available for infrastructure creation and pressing priorities in other social sectors. “The Centre has offered incentives for disinvestment by states,” she said.

The minister suggested that states undertake power reforms besides facilitating investment attractiveness and expediting ease of doing business measures.

She emphasised on smoothening land acquisition procedures and creating land banks to be tapped at the time of investment, since land is one of the major bottlenecks for project development.

Urban local bodies should be strengthened since there has been a larger allocation to them than earlier and as they are increasingly being encouraged to pursue resource mobilisation, she said.

“Since infrastructure projects require technical assistance in addition to financial resources, line ministries and DEA would extend all possible cooperation for technical or advisory assistance to states,” Sitharaman said, as per a statement by the finance ministry.

The viability gap funding provision will help finance socially relevant but financially unviable projects, especially across social sectors, she added.

Suggestions by states

“It was a very useful session, deliberating on the way in which we want to move forward post the pandemic and push for better and speedier growth,” Sitharaman said.

Some states suggested further relaxation of the limit under the Fiscal Responsibility and Budget Management Act without any conditions to enhance capital expenditures, Sitharaman said, adding that suggestions of continuing the Centre’s scheme of loan for capital expenditure beyond the current financial year were also received.

There were also suggestions on increased air connectivity for Himalayan states to support tourism prospects, a policy for offshore wind energy and better road connectivity for north-eastern states.

A stronger dispute-resolution mechanism, post-award contract enforcement and strengthening of model concession agreements in the infrastructure public-private-partnership ecosystem were among the key suggestions provided by states.

Other suggestions included an affidavit-based clearance system for new projects and a clear-cut policy and SOPs on environment and forest clearances by the Centre, besides more power to states on forest and environmental matters.

A transparent mechanism for investment facilitation involving sharing of prospective investors between the Centre and states, reassessment of the district mineral fund policy to fund utilisation across the entire state and fast-track clearance and approvals for externally aided projects by Centre, were also suggested.

“We have frontloaded many of the dues to states, which has been duly recognised by states; 50-year interest-free capital expenditure money given to states, almost like a grant, has been well-received; many states they want the scheme to be continued,” Sitharaman said.