States to get ₹12,000 cr in FY21 for capital spending2 min read . Updated: 13 Oct 2020, 08:06 AM IST
₹2,500 cr will go to N-E states, Uttarakhand, Himachal, while ₹7,500 cr will go to other states
The Centre on Monday offered cash-starved states 50-year interest-free loans worth ₹12,000 crore for FY21 for capital expenditure, to assist them and help stimulate the economy through higher infrastructure spending.
Of this, ₹2,500 crore will go to the eight north-eastern states, as well as Uttarakhand and Himachal Pradesh, while ₹7,500 crore will be provided to other states in accordance with the devolution formula of the Finance Commission. The remaining ₹2,000 crore will be kept for states that meet performance-related incentives in implementing schemes such as “one nation, one ration card", as well as power sector and urban local body reforms.
The funding will be over and above all other borrowing ceilings given to the states. “Capital expenditure has a high multiplier effect and raises not only current gross domestic product (GDP) but also future GDP, making debt more sustainable. This will also give a new thrust to the capital expenditure of states and the Centre," Union finance minister Nirmala Sitharaman said.
Initially, 50% of the earmarked loan will be given to states. The rest will be allocated once the first tranche of funds is utilized.
“States can spend the money for new or ongoing capex projects or settle bills of suppliers on such projects. All of this has to be spent by 31 March 2021," Sitharaman said.
The Centre in May raised borrowing limits for states for the current fiscal from the 3% of gross state domestic product at present to 5%, allowing them fiscal headroom of ₹4.28 trillion, subject to their carrying out specific reforms.
Of the 200 basis points (bps) increase, the first 50 bps will be unconditional while the next 100 bps will be divided into four tranches of 25 bps each, with each tranche linked to clearly specified, measurable, and feasible reform actions. These include reforms in four areas such as universalization of “one nation one ration card", ease of doing business, power distribution and urban local body revenues. The last 50 bps of the extra borrowing will be allowed if milestones are achieved in at least three out of the four reform areas.
The riders, however, turned controversial as states have been looking forward to additional resources to meet a health and economic crisis at a time when revenue collections have fallen sharply.
The 50-year interest-free loans proposal to states is a welcome move, but the size of this scheme pales in comparison to the expected shortfall in central tax devolution of ₹2.8 trillion relative to the amount budgeted by the Centre for FY21, said Aditi Nayar, principal economist, ICRA Ltd. “The eligibility of most states for the 50-year interest-free loans of ₹12,000 crore for capital spending appears to be rather modest, ranging from ₹31 crore for Goa to ₹1,462 crore for Uttar Pradesh. The relatively small size of the long-term loans to be provided by the Centre to the states is unlikely to provide any meaningful boost to capex in FY21, though it may allow for an accelerated settlement of pending dues of contractors or suppliers," she said.