To ease availability of funds for state governments to front-load capital expenditure, the Centre on Monday released two instalments of tax devolution totalling Rs 1.18 trillion for June instead of the normal monthly devolution of Rs 59,140 crore.

As per the norms, tax devolutions to states are made in 14 instalments in a year, with four instalments released in the last two months. In FY23, the Centre released one extra instalment of devolution in August and another in November in view of a slowdown in states’ capital expenditure.

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This is the first time devolution has been advanced in the first quarter itself. “The advance release is mainly aimed at helping states accelerate capital expenditure,” a senior official told FE.

The finance ministry on Monday said one advance instalment in addition to the regular instalment due in June is being released to enable states to speed up capital spending, finance their development/ welfare-related expenditure and also make available resources for priority projects/ schemes.

“Upfront release of tax devolution will help the states speed up their spending. Clarity on the quarterly devolution amount could also help states improve the estimation of their borrowing requirements,” rating agency Icra chief economist Aditi Nayar said.

Tax devolution, grants and loans are the main forms of transfer of resources by the Centre to the states. The Centre has estimated tax devolution to rise by 7.7% on-year to Rs 10.2 trillion in the FY24 Budget estimates.

The Centre’s increased magnitude of the interest-free capex loan at Rs 1.3 trillion in FY24, compared with Rs 0.81 trillion in FY23, would also augment the resources available to states for capex in the current fiscal.

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However, the third instalment of Rs 33,300 crore out of the untied Rs 1 trillion capex loans to states in FY24 would be disbursed on utilisation of 75% of the amount released in the first two, and on meeting 45% of the total capex target fixed by each state.

Given that states usually achieve around 30% of their annual investment in the first half of a financial year, the advance release of tax devolution would give the liquidity required to step up capex in H1 of FY24.

An analysis of 20 major states showed that their capex growth was flat in FY23 (excluding central capex support) compared with 29% growth in FY22.