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As per the study by ICRA, as many as 13 major states have a massive fiscal space of Rs 7.4 lakh crore for capital spending in the current fiscal, which is 81 per cent higher than the last fiscal.
Key Takeaway
- Fiscal space refers to the flexibility in a government’s budget that allows it to provide resources for the desired purpose without jeopardising the sustainability of its financial position or the stability of the economy
ICRA observations
- GDP share
- These 13 major state governments, namely Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal account for 85 per cent of India’s GDP in 2020-21.
- Estimated capital spending:
- These 13 states had made a capital expenditure of Rs 4.1 trillion last fiscal year. Their Budget estimate for Capex spending this fiscal is Rs 5.8 trillion, the rating agency added.
- Assessment:
- Based on this, ICRA has made an assessment that these states will have adequate resources to fully fund and/or exceed their budgeted Capex this year, but has expressed apprehensions about whether these state’s Capex will exceed the budgeted level, despite ample fiscal space to do so.
Capital expenditure (Capex)
- What?
- It is the money spent by the government on the development of machinery, equipment, building, health facilities, education, etc.
- It also includes the expenditure incurred on acquiring fixed assets like land and investment by the government that gives profits or dividends in future.
- Along with creating assets, loan repayment is also a capital expenditure, as it reduces liability.
- Significance
- Capital spending is associated with investment or development spending, where expenditure has benefits extending years into the future, hence acting as a multiplier.
- It also increases labour participation, takes stock of the economy and raises its capacity to produce more in future.
- Revenue Expenditure
- Unlike capital expenditure, which creates assets for the future, revenue expenditure is one that neither creates assets nor reduces any liability of the government.
- Examples: Salaries of employees, interest payment on past debt, subsidies, pension, etc., fall under the category of revenue expenditure. It is recurring in nature.
Interest-free Capital expenditure (Capex) loan
- Launch:
- The Centre first launched it in October 2020-21 as part of the measures to support economic activity.
- As part of the Aatmanirbhar Bharat Package, the government had announced that the Centre will offer Rs. 12,000 crores special interest-free 50-year loan to states, exclusively for capital expenditure.
- Funding
- However, the government stepped up scheme allocation in 2022-23 to Rs 1 trillion from around Rs 150 billion in the previous two years.
- Aim:Â
- To boost capital expenditure by the State governments which are facing a difficult financial environment this year due to the shortfall in tax revenue arising from the Covid-19 pandemic.
off-budget borrowings
- About
- It refers to the loans taken by state entities, special purpose vehicles, etc., which are expected to be serviced through the state government’s budget instead of the cash flows or revenues generated by the borrowing entity.
- Recent developments:
- The Union government has recently clarified that henceforth, off-budget borrowings would be considered as borrowing of the state government and would be subject to Article 293(3) of the Constitution of India.
- The Centre hence, would be adjusting the incremental off-budget borrowings raised by the state governments in 2021-22 from their net borrowing ceiling over a one to four-year period, beginning in 2022-23 and ending in 2025-26.
- Article 293(3): A State may not without the consent of the Government of India raise any loan if there is still outstanding any part of a loan which has been made to the State by the Government of India or by its predecessor Government, or in respect of which a guarantee has been given by the Government of India or by its predecessor Government.
Content Source: Indian Express