Most states increase capital spending but fail to rein in revenue spending

With growth severely hit by the pandemic and private capital spending showing no signs of recovery, the Center had decided to significantly increase its capital spending for FY22 and also pushed states to do the same. . He also urged states to increase capital spending by raising borrowing limits and interest-free loans.

Activity area analysis of the trend of capital expenditure and government revenue of 23 states based on data available from the CAG showed that most states recorded an increase in their capital expenditure in the first quarter of 2021-22 compared to pre-pandemic levels in the first quarter of FY20. However, few major states such as Maharashtra, Tamil Nadu and Gujarat saw declines in capital spending. Most states also struggled to control tax expenditures in this fiscal year.

The combined capital expenditure of these 23 states in the first quarter of the current fiscal year was ₹68,659 crore, 15% higher than the capital expenditure of ₹59,344 crore in the first quarter of the FY20 and nearly 62% higher than ₹36,216 crore capital expenditure in the pandemic-hit first quarter of FY21.

The increase in capital spending in the first quarter of FY22 comes despite the devastating second wave of the Covid-19 pandemic which severely affected the economy in addition to claiming thousands of lives.

Leaders in capex

Among the states, Uttar Pradesh topped the list of capital spending with an expenditure of ₹9,734 crore in the first quarter of FY22 compared to ₹7,683 crore in the first quarter of FY20. was followed by Madhya Pradesh (₹8,761 crore), Haryana (₹5,495 crore), and Andhra Pradesh (₹4,606 crore).

Curiously, highly industrial states such as Maharashtra, Gujarat and Tamil Nadu, which contribute a substantial share to India’s Gross Domestic Product (GDP), lag at the bottom of the investment expenditure chart. In fact, these three states’ capital expenditures in the first quarter of the current fiscal year were even lower than their expenditures in the first quarter of FY20.

Maharashtra has been hit hard by the second wave of the Covid-19 pandemic, which could be one of the main reasons for the sharp decline in investment allocation compared to previous years.

Financial accounts of states such as Goa and Assam and union territories such as Delhi, Pondicherry and Jammu and Kashmir were not available on the Comptroller and Auditor General of India (CAG) portal and were therefore excluded from the calculation.

Incentive capex

Capital expenditure, by its nature, has a high multiplier effect with an ability to attract private investment which in turn improves productive capacity leading to higher economic growth and job creation. It is for this reason that the Center has constantly urged States to increase their investment spending, in particular to regain growth in the aftermath of the global pandemic. Additionally, state capital spending has a higher growth multiplier potential than the Center because it is closer to the local community.

In April 2021, the Center announced that it would provide an additional amount of up to ₹15,000 crore to states as a 50-year interest-free loan for expenditure in investment projects, including 5,000 crore ₹ if states undertake asset monetization and divestment of their public sector enterprises. . The program was a continuation of the ₹12,000 crore 50-year interest-free investment loan granted to states to be spent on new or ongoing investment projects under the “Atma Nirbhar Bharat package”.

Last week, the Center announced that eleven states including Andhra Pradesh, Bihar, Chhattisgarh, Haryana, Kerala, Madhya Pradesh, Manipur, Meghalaya, Nagaland, Rajasthan and Uttarakhand , met the target set by the Ministry of Finance for capital expenditures in the first quarter of FY22.

As an incentive, the Center allowed these states to borrow an additional ₹15,721 crore (or 0.25% of their gross domestic product (GSDP)) on the open market.

In a report titled “State Capital Spending Progress – Q1 FY22,” CARE Ratings said, “The June quarter of current financial data shows encouraging trends with state capital spending regaining momentum. A massive increase in planned government capital spending for FY22, coupled with various recent government investment announcements, is expected to provide a much-needed boost to state capital spending in the future. to come up.

Increase in revenue expenditure

On the other hand, the increase in state tax expenditures is worrying.

According to CAG data, the total revenue expenditure of the sample of 23 states considered fell from ₹5.76 crore in the first quarter of FY20 to ₹6.28 crore in the first quarter of the current financial year .

For example, Andhra Pradesh’s revenue expenditure more than doubled to ₹51,971 crore in the first quarter of FY22 from ₹22,583 crore at the end of the first quarter of FY20. , revenue expenditure of Bihar and West Bengal increased by ₹20,878 crore and ₹16,644 crore, respectively, during the comparable period.

Speaking in a recent webinar, India’s chief economic adviser, KV Subramanian, criticized state governments for spending taxpayers’ money on tax expenditures in the form of giveaways and populist schemes. He asked them to focus instead on introducing supply-side reforms and increasing capital spending to attract private investment and spur growth.

Citing a study by the National Institute of Public Finance and Policy (NIPFP), Subramanian pointed out that for every rupee invested in revenue spending, the multiplier for the economy is between 92 and 98 paise while in case of capital expenditure, for every rupee invested, the addition to the economy is ₹2.25 rupees during the same year and ₹4.80 during the entire capital expenditure.

Capex in the social sector

State capital revenues and expenditures are classified into the general, social and economic sectors. Unsurprisingly, a large share of state investment spending has gone to the social sector, which includes spending on building health and education infrastructure. Many states have beefed up hospitals and emergency facilities to handle the Covid crisis.

For example, Uttar Pradesh’s capital expenditure in the social sector jumped more than tenfold to ₹2,439 crore in Q1FY22 from ₹183 crore in Q1FY20. Similarly, social sector expenditure in Andhra Pradesh also increased tenfold to ₹3,185 crore (₹303 crore) during this period.

Economic sector spending covers infrastructure spending on roads, railways, ports, and other economic activities fueling growth, while the general sector captures all other spending.

The Center also spent heavily on capital expenditures. The Center’s capital expenditure in the first quarter was ₹1.11 lakh crore, 55% more than ₹63,000 than the government’s actual expenditure in Q1FY20.

The Center has budgeted $5.54 million in capital expenditures for FY22, 85% above the fiscal year 2019 target of $2.99 ​​million and one of the highest allocations. higher for more than a decade.

“At the central government level, capital expenditure amounted to ₹1.11 lakh crore in the first quarter of the current FY, or 20% of the FY22 budget estimate. In relative terms , the Center tended to spend about one-fifth of the budgeted amount in the first quarter of the year. Clearly, with revenue stream uncertainty a concern, even the Center has been slow on capital spending to begin with,” the CARE Ratings report noted.