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

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.

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