The Centre on Wednesday released two instalments of tax devolution to State Governments totalling ₹1,16,665.75 crore. The monthly amount for August 2022 would have otherwise been ₹58,332.86 crore.

The release of two instalments in one go is in line with the Centre’s commitment to strengthen the hands of States to accelerate their capital and developmental expenditure, the finance ministry said.

Economists see the move as positive, as it could improve liquidity and nudge the States to take up capital expenditure. 

Madan Sabnavis, Chief Economist, Bank of Baroda, told BusinessLine that the development has come about primarily because the Centre’s revenues this fiscal have been “very buoyant”. 

Aditi Nayar, Chief Economist, ICRA, said that the step-up in the Central tax devolution, from ₹47,800 crore each in April-May-June 2022, will encourage States to increase their capital spending in the following months. 

Presuming that the amount devolved in July 2022 was half that in August 2022, as the latter has been pegged as two monthly instalments, it implies that ₹3.18 lakh crore has been devolved in the first five months of FY2023, Nayar said. 

“We anticipate that central tax devolution will need to be as large as ₹9.3 trillion in FY2023, overshooting the FY2023 budget estimates, led by an expected upside in non-excise tax revenues. The assessed amount released so far works out to 34 per cent of our estimate for tax devolution for FY2023, and a sizeable growth of 49 per cent over the corresponding period of FY2022,” she added.

ICRA had earlier highlighted that central tax devolution would overshoot the FY2023 budget estimates, warranting an early reassessment of the monthly amounts shared with States to enable them to boost their capital spending, given the lead time required to plan and execute capital projects. In FY2022, a large part of the upside in tax devolution was back-ended to Q4, which ended up reducing State government borrowings that quarter but did not translate to higher spending, according to Nayar. 

Sabnavis said that the capex States can undertake depends on the balance they have after paying salaries, interest, subsidy, and so on. Two instalments in one go does not mean the Centre is giving more to States this fiscal — the Centre could reduce the monthly instalments at the end of the fiscal year , based on its fiscal position, according to Sabnavis. But this frontloading of tax devolution would certainly help States decide on taking up capital expenditure at the earliest, he added.