Editorial of the Day: The Capex Push

Editorial of the Day (20th Jan): The Capex Push

This editorial covers Post-COVID-19 States' fiscal deficits were contained under 3% of GDP in 2021-22 and 2022-23, despite increased borrowing limits set by the Union government.

Context: Post-COVID-19 States’ fiscal deficits were contained under 3% of GDP in 2021-22 and 2022-23, despite increased borrowing limits set by the Union government.

The Challenge

State governments, cumulatively, spend more than the central government, accounting for over three-fifths of total general government expenditure.
The necessity to switch focus from revenue expenditure to capital expenditure (capex).

Initiative

In the financial year 2023-24, there was a significant shift in spending priority, with more allocated towards capital expenditure.
The states that significantly increased their capex included Uttar Pradesh, Goa, Manipur, and Meghalaya, with a notable growth by a modest 9.3 per cent from April-September 2023.

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Quality and Efficacy

The ratio of quality of total expenditure to total outlay for these states improved, signifying a shift towards capex.
There was a shift in capex to the Gross State Domestic Product (GSDP) ratio, indicating a one percent increase in the capital outlay, effectively leading to a 0.08-0.24 percent increase in states’ GDP.

Results

Despite an overall tepid growth in overall revenue receipts, states had to resort to market borrowings for funding their expenditure due to a decrease in central transfers.
The gross market borrowings were substantial during the first nine months of FY 2023-24.
However, a significant portion of these borrowings was not allocated for capex but for revenue purposes.

Implications

States’ capital expenditure saw significant funding via an array of complex processes, including tax devolution and the release of instalments under centrally sponsored schemes.
The Union government advanced capital expenditure grants, approving and releasing a sizable amount for the scheme budgeted till November 2023-24.

Conclusion

The shift towards increased capex by states indicates a positive trend towards bolstering growth.
However, the challenge remains in ensuring that borrowings and funds are efficiently utilised for the intended capex to stimulate economic activity and infrastructure development.
The need for improved tax administration and efficiency is also highlighted to augment the states’ own revenue, thereby reducing reliance on central transfers and borrowings.