BackWith extra funds, will states increase capital expenditure?
Looking at their track record and at the finance commission’s numbers, it’s likely the states will use extra funds they receive to push capex, doing their bit to help revive investment demand
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According to Indian Public Finance Statistics, 2013-14, the total capital expenditure of the centre in 2011-12, including loans and advances for capital expenditure, amounted to ₹ 141,042 crore. In the same year, the total capex by the states was ₹ 200,401 crore. So the states together spent 42% more on capex than the central government did. (2011-12 is the last year for which actual numbers by the states are given, rather than estimates.) If we want to find out whether the government is spending on infrastructure, we would need to look not merely at what the centre is doing but also at the states.
Now that the central government has accepted the recommendations of the 14th Finance Commission and has started sharing more tax revenue with the states, how will the states spend the extra money? Will they increase wages and salaries or spend more on social welfare programmes and subsidies, or will they spend it on infrastructure? Reserve Bank of India (RBI) governor Raghuram Rajan has said states may use the money to reduce fiscal deficits.
Well, the states aren’t really getting as much extra money as is being hyped. Kotak Economic Research says that M. Govinda Rao, one of the members of the 14th Finance Commission, in a conference call with investors, said, “Overall, the share of grants and tax devolution to states in the gross revenue receipts has been projected to increase to 49.4% in FY2020E from 47.5% in FY2015."
Abhijit Sen, another finance commission member who dissented with the others, wrote an article in The
Indian Express saying, “The total transfers from the centre to the states go up from ₹ 7.62 lakh crore in 2014-15 (budget estimate) to ₹ 7.93 lakh crore in 2015-16, a nominal increase of only 4%." But the fact remains the states now have more untied funds and more leeway in deciding what to do with them.
The states are fiscally far more responsible than the centre. In 2011-12, for instance, while the centre’s fiscal deficit was 5.7% of gross domestic product (GDP), the combined fiscal deficit of the states was 1.9%. However, the finance commission report estimates that the combined fiscal deficit of the states would be 2.76% of GDP in 2015-16 and would remain at around that level till 2017-18. Note that it puts the 2013-14 revised estimate for the states’ fiscal deficit at 2.5% of GDP and the budgetary estimates for 2014-15 at 2.4% of GDP, so that means the states’ fiscal deficit is expected to go up. Similarly, the finance commission has projected the states’ revenue deficits to go up in the next few years, which means the quality of their deficits, too, isn’t improving. In short, Rajan’s view that the states’ fiscal deficit will be lower and, consequently, the overall fiscal position of the country will improve isn’t supported by the numbers put out by the finance commission. What is the record of the states in pushing capital expenditure? In 2011-12, the centre’s capital expenditure was a mere 12.3% of its revenue expenditure. In the same year, the combined capital expenditure of the states amounted to 18.9% of their total revenue expenditure. So the states are doing much better than the centre when it comes to capital expenditure. Remember also that a large chunk of capex by the centre is on defence, where most of the equipment is imported, so the role of the states in spurring investment demand becomes even more pronounced.
Over one-third of the capital expenditure by the states is on power, irrigation and flood control, with irrigation being the largest component. The other big allocation goes towards building roads and bridges. True, there is a substantial amount of capex spent on social and community services, but then, spending on constructing a school or a medical facility is also capex and helps provide much-needed jobs in the construction sector, apart from improving social capital.
The Economic Survey shows that both in terms of benefits per capita and benefits as a percentage of net state domestic product, Arunachal Pradesh has benefited the most from the finance commission’s transfers, followed by the northeastern states, Jammu and Kashmir and Himachal Pradesh. But in absolute numbers, the biggest beneficiaries are Uttar Pradesh, West Bengal, Madhya Pradesh, Jammu and Kashmir and Bihar, in that order. Of these, as a percentage of state domestic product, the northeastern states, Uttar Pradesh, Madhya Pradesh, Bihar and Jammu and Kashmir have a higher proportion of capex in their budgetary estimates for the current fiscal, compared with the states’ average.
Looking at their track record and at the finance commission’s numbers, it’s likely that the states will use the extra funds they will receive to push capex, doing their bit to help revive investment demand.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments and feedback are welcome at capitalaccount@livemint.com
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