State govts need to rev up capital expenditure to spur economic growth
Several state governments are still reeling under the lingering impact of the pandemic-induced slowdown and struggling to wriggle out of the revenue expenditure trap, where the exchequer gets nearly emptied for paying salaries, pensions and interest on loans. Their revenue expenditure is growing out of proportion, with most available funds spent on running a mammoth government, servicing the ever-ballooning debt and paying for subsidies. That leaves precious little for creating fixed assets.
Amid curbs on their borrowing, several states find it hard to rev up their capital expenditure, and the numbers available for the first six months of 2022–23 tell us a story. The combined capex of 19 large states, including Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra, UP, MP and Gujarat, is up marginally at Rs 1.67 lakh crore, nearly one-fourth of their total budgeted capex (Rs 6.58 lakh crore) for 2022-23. States had planned an increase of 40% in capex, but most of their proposals remain on the drawing board. On the flip side, their revenue spending is set to rise around 20% to Rs 36.2 lakh crore in the current fiscal.
On the borrowing front, New Delhi had put a ceiling for all states in 2022–23 at Rs 8.5 lakh crore, equivalent to 3.5% of their collective GSDP. But to keep up the capex momentum, it has offered them a soft loan of Rs 1 lakh crore, 80% of which is a 50-year interest-free loan. The silver lining is that the states have reported a leap in tax revenues in the first six months. Their combined tax revenues grew over 30% to `11 lakh crore in April-September, riding the resilient state tax revenue collections and higher devolution released by New Delhi.
The slow growth in capex has a direct bearing on private investment, employment scenario and India’s economic growth as a whole. Without a doubt, creating capital assets generates future cash flows for the economy and helps spur consumer demand. Historically, there has been a concentration of capex in a few large states such as Maharashtra, Tamil Nadu, Karnataka, UP and MP. While seriously trying to slash inefficient revenue expenditure, states should try to beef up capex and help generate demand in the economy, leaving it to create a multiplier effect. States have the last-mile connectivity to the direct beneficiaries and carry equal responsibility for capital formation on par with the Central government.