Amid acute budget constraints, states slash capex to focus on Covid spend

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December 7, 2020 8:30 AM

Borrowings by the twelve states whose finances were reviewed by FE rose 50% on-year to Rs 2.28 lakh crore in April-October of this fiscal compared with 2.6% increase in the year ago period.

Information gathered by FE shows that Karnataka collected Rs 9,272 crore as OTR in October, up 14% on-year and Rajasthan garnered Rs 5,544 crore (up 25%).

Amid acute budget constraints, state governments have not only borrowed heavily post Covid but also used the proceeds expeditiously to step up budgetary spending to the extent possible. However, they had to undertake sharper capital expenditure cuts in first seven months of current fiscal to sustain the momentum of welfare and routine spending.

According to a review of budgetary spending by 12 states by FE, in April-October this year, their capex was down 23% on-year; considering that the combined capex by all states was budgeted to increase by 30% on-year in FY21, the slippage in state capex from the budget target is sure to have been unprecedentedly steep.

Despite 1.2% increase in revenue expenditure to cater for essential spending such as on welfare and relief measures, lower capex pulled down these states’ total expenditure by 1.4% on-year in April-October this fiscal. For the Centre, the overall budget spending in the first seven months was flat on-year.

If public-sector fixed capital formation has held up in recent years even amid a worrisome, prolonged decline in private investments, the contribution of state governments has been vital; state capex is also seen to have a higher growth multiplier potential than Central Budget/CPSE capex.

While Centre’s Budget capex declined 2% on-year in April-October, a conscious effort is being made by the government to ensure that the CPSEs ramp up investments in this fiscal.

The curbing of capex by the states is primarily due to the acute revenue constraints they are facing. While the low revenue buoyancy was evident in the last year itself, the situation has aggravated due to the pandemic. Even after liberal transfers by the Centre from the divisible tax pool in the initial months of this fiscal, tax revenues of the 12 states declined by 16% on-year during April-October.

To be sure, many states have in recent months seen a rise in own tax revenues (OTR) from the lows witnessed in the lockdown period. From the range of 25-50% of normal in May, OTR of most states in October either surpassed or was at par with the same in the year ago month.

Information gathered by FE shows that Karnataka collected Rs 9,272 crore as OTR in October, up 14% on-year and Rajasthan garnered Rs 5,544 crore (up 25%). Kerala’s own tax collection in October was about 90% of the mop-up in the year-ago month.

Among them, the twelve states — Tamil Nadu, Madhya Pradesh, Andhra Pradesh, Karnataka, Rajasthan, Odisha, Telangana, Kerala, Chhattisgarh, Haryana, Jharkhand and Uttarakhand — reported a combined capital expenditure of Rs 92,391 crore in April-October of FY21 compared with Rs 1,14,011 crore in the year ago period.

The combined capex by all states is projected to rise to Rs 6.46 lakh crore in FY21 over FY20 actuals. The states had slashed their capex to Rs 4.97 lakh crore in FY20 from BE of Rs 6.22 lakh crore, as per the recent RBI report on state finances. “Capital expenditure undertaken by states, which accounts for more than 60% of general government capital expenditure is generally treated as a residual and is prone to adjustment, conditional upon revenue generation. In 2017-18 and 2018-19 as well, capital spending was reduced from budgeted levels,” the RBI said in the report.

Borrowings by the twelve states whose finances were reviewed by FE rose 50% on-year to Rs 2.28 lakh crore in April-October of this fiscal compared with 2.6% increase in the year ago period.

What is more worrisome for the states is that the Centre which transferred budgeted amounts to state governments as their tax share from divisible pool in April-May, but has since found this practice unsustainable — October transfers were a fifth less than envisaged in budget, at Rs 37,233 crore. The customary pattern is the Centre makes adjustments on state tax transfers based on actual receipts only during February-March, the final two months of a financial year.

With tax devolution coming down drastically in the remaining months of this fiscal, the states are sure to further accelerate borrowings to make up partly for revenue shortfalls.

According to Icra, the shareable tax pool may turn out to be Rs 13.4 lakh crore in FY21, 30% lower than the budgeted amount of Rs 19.1 lakh crore. The agency has projected the central tax devolution to the state governments at about Rs 5 lakh crore (after adjusting for Centre’s extra transfers of Rs 48,400 crore in FY20) in FY21, a substantial Rs 2.8 lakh crore lower than the Rs 7.8 lakh crore budgeted.

As per state budgets, their combined fiscal deficit stood at 2.6% of GDP in FY20 and 2.4% in FY19. FY21 will, however, likely see a record spike in the fiscal deficits of both the Centre and states.

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