Increased transfers from Centre will boost capital expenditure by states: Report

In a statement, India Ratings said capital expenditure by states will get a push from the capital outlay of Rs one lakh crore as announced in the Union Budget under the scheme for financial assistance to states for capital investment.

New Delhi: An increase in total transfers by the Centre to States as announced in the Union Budget will give a boost to States’ capital expenditure in the next financial year, said India Ratings and Research, which is a part of sovereign rating agency Fitch. In a statement, India Ratings said capital expenditure by states will get a push from the capital outlay of Rs one lakh crore as announced in the Union Budget under the scheme for financial assistance to states for capital investment.

It said the next year’s budget proposals will have a positive impact on the development of state infrastructure and will lead to economic development. In its report, the agency said states are allowed a fiscal deficit of 4% of their gross domestic product (GDP) for the next financial year as per the recommendations of the 15th Finance Commission led by Dr NK Singh. It said the capital outlay extended by the union government was over and above this limit.

"State governments play a significant role in bolstering a country’s growth potential and performance through the creation of capital assets," it said. India Ratings said tax devolution combined with the enhanced capital outlay will add to the fiscal space available for states to incur capex in the FY 2022-23 but they will have to undertake some reforms to be able to channelise borrowings over and above the 3.5% fiscal deficit cap set for them.

Why is increased state capital expenditure good news?

Historically, the combined capital expenditure by states has been higher than the capital expenditure of the Union Government. In four years, between FY 2015-16 to FY 2019-20, the share of capital expenditure by States averaged 2.7% of the country’s GDP as against the share of 1.7% by the Union government.

Despite the Covid-19 led lockdown and continued restrictions that halted capital works in the first year of the pandemic, capital expenditure by States was higher at 2.6% as per the revised estimates for the last financial year in comparison with the Union Government’s actual capital expenditure for the same fiscal which was 2.2% of the GDP as shown in the Budget 2022-23.

Capital expenditure are those expenditures that the government spends on building capital assets such as roads, highways, ports, seaports, schools, colleges and hospitals and other infrastructure-related projects which boosts the demand for commodities such as steel and cement and leads to employment creation.

It is also distinct from other ordinary expenditures of the government such as payment of salary and wages and other routine expenditures of the government which do not result in the creation of any assets for the government. Finance Minister Nirmala Sitharaman has allocated a record Rs 7.5 lakh crore for capital expenditure in next year’s budget.