The Centre has decided to subject sanction and release of the `1.3-trillion capex loan to states in FY24 to much more stringent conditions than for the corresponding facility in the current financial year. According to official sources, there are two objectives behind the move: ensuring these 50-year interest-free loan actually result in incremental capex growth in all states, rather than being used by them instead of the their own funds for productive spending and encouraging reforms in assorted areas by using these funds as a lure.
A third of the `1.3 trillion capex loans to state governments in FY24 announced in the recent Budget will be tied to various conditions, as against a fifth of the `1 trillion loan (revised estimate `76,000 crore) allocated in the current year, the sources said.
Also, a portion of the unconditional loans to states (two-thirds of the budget estimate for FY24), will be made on the fiduciary condition that their capex exceeds the previous year’s achievement by a prescribed margin under the scheme. The incremental capex target for states is being worked out.
For FY24, one-third or roughly `40,000 crore would be tied to reforms and specific objectives while around `90,000 crore would be untied compared with `20,000 crore tied and `80,000 crore untied funds to states in FY23 budget estimate (BE).
“If some states are not doing reforms, the Centre can reallocate their quota to the unconditional component of compliant states,” a senior official said.
The states, which comply with reforms condition and incremental capex norms would have a head-start next year and could corner greater pie than they are entitled to. from the liberal loan facility.
The tied funds next year pertain to scrapping old government vehicles, urban planning reforms and actions, financing reforms in urban local bodies to make them creditworthy for municipal bonds, housing for police personnel above or as part of police stations, constructing Unity Malls, children and adolescents’ libraries and digital infrastructure, and state share of capital expenditure of central schemes.
The FY24 grant-like capex support of `1.3 trillion to states is 71% higher than the FY23 revised estimate of `76,000 crore for FY23 and up 30% over the budget estimate of `1 trillion.
“States cannot resort to reducing their own capex because they are getting central assistance for capex. That is not the purpose of the scheme,” another official said.
This clause for untied funds seems to have been triggered by the capex trends by states in FY23. Despite Central assistance, the combined capex of sttes grew just 0.9% in April-October as against the ambitious annual target of 38%, according to data released by the Reserve Bank of India recently.
Eighteen states whose finances were reviewed by FE reported capex growth of just 7.5% on year in April-November of the current fiscal. The slow growth in states’ capex has led to fears that states are substituting a portion of their own capex with central capex support.
The reduction allocation for the current financial year was on account of delayed compliance with the fiduciary condition that states should not contradict any of the central government’s brand names in the centrally sponsored schemes. This condition led to delays in compliance in eight states including West Bengal, Telangana, Andhra Pradesh, Odisha, Tamil Nadu and Rajasthan.
“West Bengal and Odisha are not getting any capex support under the scheme in FY23 as they missed the deadline to comply with the basic condition on central scheme branding. Some other states would also not be able to fully utilise their quota this year,” the second official said.
The untied funds are allocated amongst the states in proportion to their share of central taxes as per the award of the 15th Finance Commission.
Some states would also not be able to fully utilise the `20,000 crore linked to reforms in FY23, the official added.
The Centre has made a steep increase in budgetary capital expenditure by 37.4% on year to `10 trillion for the next financial year, including long-term interest-free loans to the state governments.