Borrowing spike not to deter huge public capex slippage: Analysts

By: and |
Published: May 20, 2020 1:00:37 AM

“The time-frame is limited, so one can’t expect everything (all borrowings) in a year in these unprecedented times when the focus is on pure survival,” SBI’s Ghosh said.

FE has recently reported state governments have applied brakes on capital expenditure in the second half of FY20. FE has recently reported state governments have applied brakes on capital expenditure in the second half of FY20.

Despite the hikes in borrowing by the Centre and states, the big revenue hole will imply that they will still have combined ‘uncovered (revenue) loss’ of Rs 7.56 lakh crore in FY21, SBI EcoWrap has estimated. This, in turn, could debilitate general government capital expenditure. The researchers warned that states’ capital expenditure in FY21 might turn out to be half the budgeted level of Rs 8.8 lakh crore. They also noted that the Centre’s budgeted capex for the current fiscal year might be equivalent to its uncovered loss of Rs 4.36 lakh crore, implying a huge potential cut in its capex too.

FE has recently reported state governments have applied brakes on capital expenditure in the second half of FY20. An analysis by FE of the finances of 14 state governments showed that their capex declined marginally in April-February of FY20 compared with about 20% growth in such expenditure in the corresponding period of previous fiscal. Given that only 58% of the FY20 capex target of Rs 3.6 lakh crore was achieved in the first eleven months, these states must have witnessed huge capex slippage for the whole of the year. Going by SBI research, what the states are going to witness is a unprecedented deep fall in capex that started somewhere in the middle of last fiscal and through FY21.

Public capex has been a key driver of economic activities in the past few years in the absence of strong private support. In recent years, the ratio of public capex has been roughly in the 5:5.5:3.5 ratio among the CPSEs, states (budget) and the Centre (Budget).

The SBI researchers also highlighted that out of Rs 4.28 lakh crore extra borrowing limit for states, only up to Rs 3.13 lakh crore (73%) might be actually utilised by the state governments in FY21. Based on an analysis of 20 states, SBI chief economist Soumya Kanti Ghosh said only eight of them are in a position to fulfil all the reform conditions stipulated by the Centre and avail of the extra borrowing limit of 2% of gross state domestic product.

“We find some of the states like West Bengal, Telangana, Bihar, Odisha, Assam, Jharkhand, Chhattisgarh need to fulfil the conditional ties to avail of the borrowings,” Ghosh said. “For instance, West Bengal and Odisha have not adopted the UDAY programme, so they can’t benefit entirely,” he said.

Analysts say the increase in borrowing limit is unlikely to require amendment in the FRBM Act for individual states. This, because the Act also permits ‘exceeding annual fiscal deficit target due to ground or grounds of national security, act of war, national calamity, collapse of agriculture severely affecting farm output and incomes, structural reforms in the economy with unanticipated fiscal implications, decline in real output growth of a quarter by at least three per cent points below its average of the previous four quarters”.

Pronab Sen, noted economist and former chief statistician, told FE the Centre shouldn’t have applied conditions for granting a one-time relaxation on the borrowing limit, that too, for just a year and for a specific crisis.

“The bigger, richer states can tap the window fully by complying with the reform measures, but what about the relatively poor ones,” he asked.

“States collectively may have already lost revenue of just under 1% of the GDP (close to `2 lakh crore) and they will lose more later. So about 1.5% of the extra borrowing limit, in any case, will essentially go towards meeting the revenue loss. The additional 0.5%, which is a small amount, can then be utilised to tackle the pandemic. And they have to take care of other issues, including the one involving migrant labourers,” Sen said. He added that the Centre, too, had raised its own borrowing target, without pegging it to any reform condition.

Even states’ human resources are stretched, given the social distancing norms. Imposing reform measures at a time when they are at the forefront of battling the Covid-19 crisis isn’t a good step, some analysts said. Whether states use this extra borrowing window or not, is their choice, but giving that choice to them is critical, they added.

“The time-frame is limited, so one can’t expect everything (all borrowings) in a year in these unprecedented times when the focus is on pure survival,” SBI’s Ghosh said.

Most difficult reforms could be the rolling out direct benefit transfer (DBT) for electricity subsidy to farmers and households. Some states like Madhya Pradesh, Karnataka and Punjab are in the process of rolling out power subsidy directly to the bank accounts of beneficiaries, instead of routing it through power discoms, whose finances have worsened due to non-release of their dues by respective state governments.

“States should pay the farmer the cost of electricity and let farmer pay to discoms so that we know that subsidy actually goes to farmers,” expenditure secretary TV Somanathan said on a news channel. “Many states say that there are leakages and this will help reduce these leakages… Power theft can’t be shown by states as free supply to farmers,” Somanathan said.

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