The Centre should continue incentivising the states for reforms and higher capital spending as a capex-led growth strategy will ensure sustainable general government debt levels in the medium term, economists in the finance ministry said.
The Centre has budgeted a whopping Rs 7.5 trillion in FY23, up 27% on the year, including a generous Rs 1 trillion in 50-year interest-free capex loans to states. It is widely expected that the Centre could make a provision of Rs 8.5-9 trillion capex budget including Rs 1 trillion or thereabout capex loan to support to states for FY24 as well.
“The increase in capex has large-scale positive implications for medium-term growth. This capex-led growth strategy will enable India to keep the growth-interest rate differential positive, leading to a sustainable government debt to GDP in the medium run,” the economists said.
Besides capex loans, the support provided by the Centre in terms of enhanced borrowing ceilings, and advance releases of payments to the states (tax devolution and GST compensation) are aimed at prioritising their spending on capex. States’ aggregate capex grew by about 32% to `5.89 trillion in FY22 and is projected to grow 38% on year to `8.19 trillion in FY23.
However, the combined capex of eighteen states whose finances were reviewed by FE was up just 7.5% on year at Rs 2.41 trillion in April-November of the current fiscal, indicating that the achievement could fall short of the aggregate target for all states.
“The Centre should continue incentivising the states for reforms and higher capital spending to ensure a stronger general government,” the economists said, adding that capex-led growth to bring back animal spirits and manage debt levels.
The General Government Debt to GDP ratio increased from 75.7% in FY20 to 89.6% in the pandemic year of FY21. It is estimated to have declined to 84.5% in FY22. The debt to GDP was projected to be 86.5% in FY23, but it would be lower than that as states are expected to undershoot their borrowing target and benefit from a higher nominal GDP.
Despite these additional fiscal pressures during the year due to higher subsidies on food and fertiliser, the Centre is on track to achieve the fiscal deficit target of 6.4% of GDP in FY23, aided by the recovery in economic activity and buoyancy in revenues from direct taxes and GST.
“With resilient economic growth, continued revenue buoyancy, and careful expenditure management over the medium run, the Union Government will be on track with the fiscal path outlined by the Medium-Term Fiscal Policy Statement (4.5% fiscal deficit by FY26).
In the pandemic-hit FY21, states’ consolidated gross fiscal deficit (GFD) rose to 4.1% of GDP, the highest level since FY05. However, the spike was short-lived and a reversion to consolidation was crafted in FY22 taking the GFD down to 2.8%, as against the budget estimate of 3.5% and revised estimate (RE) of 3.7% for that year. For, FY23 states’ aggregate GFD is set at 3.4%, but it will likely undershoot going by the trends in their borrowings so far.