Centre doubles August devolution to Rs 1.17 trillion to aid states’ capex

Icra sees extra devolution at Rs 1.1 trillion over FY23BE

Centre doubles August devolution to Rs 1.17 trillion to aid states’ capex
In FY22, a large part of the upside in tax devolution was back-ended to Q4, which ended up reducing state government borrowings in that quarter but did not translate to higher spending.

The Centre has released two installments of tax devolution to state governments amounting to Rs 1,16,666 crore for August, against the normal monthly devolution of Rs 58,333 crore, to arrest a decline in their capital expenditure.

“This is in line with the commitment of the government of India to strengthen the hands of states to accelerate their capital and developmental expenditure,” the finance ministry said in a statement.

The combined capex of twenty states whose finances were reviewed by FE was down 9% on year to Rs 55,057 crore in the June quarter. These states, which represent roughly 80% of the country’s gross domestic product (GDP), had reported a whopping 118% capex growth in Q1FY22, partly aided by a favourable base.

The states have regulated capital spending, bucking the trend of acceleration in recent years because of concerns over revenues after the cessation of the goods and services tax (GST) compensation. Also, market borrowings of many states have been impacted as the Centre’s approvals got delayed.

As per the Finance Commission’s devolution formula, Uttar Pradesh got Rs 20,929 crore in August, followed by Rs 11,734 crore for Bihar, Rs 9,158 crore for Madhya Pradesh and Rs 8,777 crore for West Bengal.

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Presuming that the amount devolved in July 2022 was half of the August 2022 figure, as the latter has been pegged as two monthly installments, implies that a total of Rs 3.18 trillion has been devolved in the first five months of FY23, which is equivalent to 39% of the budget estimate (BE) of Rs 8.17 trillion.

“We anticipate that central tax devolution will need to be as large as Rs 9.3 trillion in FY23, overshooting the BE, led by an expected upside in non-excise tax revenues. The assessed amount released so far works out to 34% of our estimate for tax devolution for FY2023, and a sizeable growth of 49% over the corresponding period of FY22,” rating agency Icra chief economist Aditi Nayar said.

Central tax devolution will overshoot the FY23BE, warranting an early reassessment of the monthly amounts being shared with the states to enable them to boost their capital spending, given the lead time required to plan and execute capital projects, Nayar said. In FY22, a large part of the upside in tax devolution was back-ended to Q4, which ended up reducing state government borrowings in that quarter but did not translate to higher spending.

The Centre’s gross tax revenue rose 22% on year to Rs 6.5 trillion in Q1FY23 against a required growth rate of 1.8% to achieve the budget target of Rs 27.58 trillion for the full year.

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