States concerned about high capex in Budget 2022

• States have raised apprehensions about the rise in capital expenditure proposals outlined in the Union Budget 2022-23.
• The Budget has proposed a hike in the capital expenditure by 24.47 per cent to Rs 7.5 lakh crore compared with the revised estimate for 2021-22 at Rs 6,02,711 crore.
• Some states, however, claim this has come at the cost of a reduction in grants to states.

Hike in capex in Budget

• The capital expenditure for 2022-23 has been pegged at Rs 7.5 lakh crore.
• Together with grants in aid for creation of capital assets (including MNREGA works), the effective capital expenditure for the next year is budgeted at Rs 10.67 lakh crore, 27 per cent more than the RE of 2021-22 at Rs 8.40 lakh crore.
• This expenditure increase comes along with an increase in the state borrowing limit to 4 per cent of the GSDP.
• States have also been allowed to borrow up to Rs 1 lakh crore through 50-year interest-free loans to make capital investments.
• In 2021-22, the Centre had allowed states an additional Rs 15,000 crore for capital investment under a similar window.
• Over the course of the next 12 months, such government spending is expected to crowd in private sector investment and help create jobs.
• The government had also made provision of over Rs 2 lakh crore for states and autonomous bodies towards their capital expenditure.
• The National Infrastructure Pipeline was launched in 2020 with projected infrastructure investment of around Rs 111 lakh crore during FY 2020-2025 to build infrastructure across the country.
• NIP was launched with 6,835 projects, which was later expanded to over 9,000 projects covering 34 sub- sectors.

Concerns flagged by states

• Some opposition-ruled states have raised concerns about the enhanced capex allocation coming at the cost of a reduction in grants in aid, revenue deficit grants, subsidies for food, fertiliser, fuel and allocation for MGNREGA.
• While poor have doubled in one year to 134 million, Budget cut food subsidy by 28%, cut 100-days-work by 25%, Social Services cut (as % GDP), agri cut (% GDP), health cut (% GDP) as per Principal Chief Advisor to West Bengal Chief Minister.
• The issue has been seen with the transfer of spending on various grants and schemes to the Rs 1 lakh crore interest-fire long-term loan to states.
• This accomplishes the triple-magic of converting grants to loans, revenue spending to capital investment, and showing an eye-watering 35 per cent year-on-year increase in capital investments as per Tamil Nadu’s Finance Minister Palanivel Thiaga Rajan.
• Another state government official said that the increase in capex is merely an accounting trick even including the debt of Air India.
• In the Union Budget 2022-23, the government allocated an additional Rs 51,971 crore towards the settlement of outstanding guaranteed liabilities of Air India and its other “sundry commitments”.
• This amount has been accounted for in the Revised Estimates of the total expenditure in 2021-22.
• Subsidies for food, fertiliser and petroleum are estimated at Rs 3.17 lakh crore for 2022-23, down 26.6 per cent from revised estimates for this fiscal.

Issue over defining Capex and discussion over allocations

• There’s a backdrop to this tussle over what constitutes capex and the extent of the spends.
• In the recent years, states, in aggregate, have incurred a higher level of capital expenditure than the union government.
• The share of capex by states averaged 2.7% of GDP, as against the Union government’s share of 1.7% during FY16-FY20, Fitch-group India Ratings and Research said in a report.
• Despite the Covid-19 led lockdown and continued restrictions that halted capital works in the first year of the pandemic, capex by states was higher at 2.6% as per FY21 revised estimate (RE) than 2.2% of GDP (FY21 actual) by the union.
• Furthermore, states in aggregate incurred a higher proportion of its expenditure on capex (16.7%) than the union’s share of 13.3%, on average, during FY16-FY20.
• An amount of Rs 15.49 lakh crore was allocated as total transfers to states in revised estimates for FY22, up from Rs 13.39 lakh crore in Budget estimate for FY22.
• Now, Rs 15.56 lakh crore has been allocated for FY23, up 0.4 per cent over revised estimates for FY22.
• The increase in transfers/grants to states in FY22RE was majorly led by the “Back-to-Back Loans to States in lieu of GST Compensation Shortfall” of Rs 1.59 trillion”.
• In FY23, the total grants are budgeted at Rs 7.39 lakh crore, down from Rs 8.05 lakh crore in FY22 RE.
• The Finance Commission grants to states have seen an overall reduction of 8.98 per cent to Rs 1.92 lakh crore for 2022-23.
• Post devolution revenue grants to states are seen going down by 27.2 per cent to Rs 86,201 crore next fiscal.
• India Ratings also said that tax devolution to states could have been estimated higher than budgeted for FY23.
• It has budgeted a tax devolution of Rs 8.16 trillion for FY23.
• This, Ind-Ra believes, is an underestimation and with a union tax devolution buoyancy closer to 1x (assuming 13.6% of nominal GDP growth for FY23), the tax devolution to states is likely to be higher at around Rs 8.4 trillion than FY23BE.
• Taken together with a higher capital outlay, this would provide states with greater fiscal flexibility to boost the capital expenditure in FY23.