Capitalising on spending

As private businesses gradually recover from the pandemic, government capital expenditure has to take up the mantle for driving demand and boosting growth. As a recent report from the National Institute of Public Finance and Policy points out, for every rupee spent on capital expenditure, the addition to the economic output is ₹2.25 in the same year and ₹4.80 over the period of the capital project. However, public capital expenditure is highly decentralised in India, with over 60 per cent of the activities carried out by States. The Centre has, therefore, been nudging States to increase their capital expenditure too, through interest-free loans for tenures up to 50 years to fund capex and allowing States an additional borrowing limit if they met the higher capex target set by the Centre. Last week, RBI Governor Shaktikanta Das too exhorted the States to improve the quality of their expenditure, spend more on relevant capital projects and to keep a rein on profligate revenue expenditure.

The Centre’s measures since last year to push States seem to have had the desired impact. An analysis by this newspaper of trends in expenditure of 23 States revealed that most States have recorded an increase in their capital expenditure in the June quarter of 2021-22 when compared with the pre-pandemic levels in June quarter of 2019-20. The aggregate capex of these States was 15 per cent higher, though few of the larger States such as Maharashtra, Tamil Nadu and Gujarat recorded a decline in capex. This increase in capex spends is noteworthy since States have a poor record in meeting their targeted capital expenditure. An RBI study found that in the period between 2000-01 and 2019-20, States failed to meet the budgeted target of capex in 17 out of 20 years. There has been a tendency to cut back on capex in periods of revenue shortfall to meet fiscal deficit targets. The inability to cut back on revenue expenditure due to political pressure has been another reason why capex has typically fallen short of the budgeted amount. The Centre needs to continue its carrot and stick approach to make States increase capital spends. The pandemic has been making many States increase spending on health infrastructure. Going ahead, capex can be increased in education, skill development and promoting exports.

The elephant in the room, as far as State finances go, is the revenue expenditure that accounts for over three-fourth of total expenditure. Revenue expenditure of States has grown at a rate of 26 per cent in the June quarter of this fiscal year when compared to the corresponding quarter of FY20. A populist culture of giving freebies, heavily subsidising public services and utilities which become a millstone rather than source of revenue, and spending on schemes that have outlived their utility continue to be a big drag on State finances. Prodding the State Finance Commissions to improve the financial management of States, as suggested by Das, could mark a step forward.

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