GS Paper III

News Excerpt

The state governments in India, after pandemic-induced deficits, are now focusing on higher capital expenditure, expecting it to drive economic growth.

Shift in Fiscal Policies of State Governments:

Deficits and Borrowing Space of states:

• In both 2021-22 and 2022-23, the aggregate fiscal deficit of state governments was actually under 3 percent of GDP, despite the Union government providing them greater space to borrow, capping their deficits at 4.5 percent and 4 percent respectively.

Change in Spending Priority 2023-24:

• Dominance of State Expenditure: State governments, put together, spend more than the central government. In fact, they account for over three-fifths of total general government expenditure.
• Shift towards Capital Expenditure: In the past few years, states have been focusing more on the revenue expenditure. However, in 2023-24, there has been a shift in their spending priority with more allocated towards capital expenditure.
• Surge in Capital Outlay: The capital outlay of states (excluding Arunachal Pradesh, Goa, Manipur and Meghalaya) jumped 45.7%, while their revenue expenditure grew by a modest 9.3% during April-November 2023.
• The quality of their expenditure, ratio of capital outlay to total expenditure, which effectively implies the proportion of funds channeled towards productive assets stands at 14.1 % , an eight year high, during this period.
• This is growth enhancing. A one per cent increase in the capital outlay effectively leads to a 0.82-0.84% increase in the states’ GDP. 

Driving Forces for Capital Expenditure:

States’ capital expenditure (capex) is being fuelled by interplay of two forces:

• First, the advance release of the monthly tax devolution and timely disbursements of funds for the special scheme on capital assistance.  The Union government has been proactive in releasing the advance instalments of tax devolution in the past few years.
• Second, the states’ own revenues have been fairly buoyant. The state's own tax revenues (SOTR) and own non-tax revenues (SONTR) have grown at a good pace of 11.5 % and 19.5 % respectively during the first eight months of the year.

Challenges in Revenue Receipts:

• Shortfall in Grants from Union Government: Despite this healthy growth in states own revenues, their overall revenue receipts have grown at an average pace of 5.5 % owing to a shortfall in grants from the Union government. These fell 29.2 % during 2023-24.
•  Increased Dependency on Market Borrowings: The tepid growth in overall revenue receipts has meant that the states have had to resort more to market borrowings for funding their expenditure this year.
•    As per the latest data available, the states’ gross market borrowings were at a record of Rs 5.8 trillion during the first nine months of the year. Higher borrowings are, however, largely utilised for capex.
•  Difficulty in Achieving Fiscal Deficit Target: Based on the current trends and the NSO’s expectation of a pickup in net taxes in the second half of the year, states may find it a bit difficult to achieve their aggregate fiscal deficit target of 3.1% of GDP. 

Conclusion:

The proactive approach of state governments towards capital expenditure is a positive sign for economic development. This shift, supported by timely assistance and buoyant revenues, holds the potential to boost growth, create employment opportunities, and enhance infrastructure, contributing positively to the overall well-being of the states and the nation.

Prelims PYQ

Q. Which of the following is/are included in the capital budget of the Government of India? (UPSC 2016)

1. Expenditure on acquisition of assets like roads, buildings, machinery, etc.
2. Loans received from foreign governments
3. Loan and advances granted to the States and Union Territories

Select the correct answer using the codes given below:

(a)    1 only

(b)    2 and 3 only

(c)     1 and 3 only

(d)    1, 2 and 3