Capex-funding plan for FY23 gets flak from some non-BJP ruled states

While Bengal, Kerala and TN hit out, Maharashtra welcomes Centre's move

The Rs 1-trillion allocation to states by Union finance minister Nirmala Sitharaman for capex spending in FY23 has drawn criticism from some non-BJP ruled states for lack of flexibility in the scheme.

In her Budget speech, Sitharaman announced that enhanced assistance will be provided to states through 50-year interest-free loans. These will be under the ‘Scheme for Financial Assistance to States for Capital Investment’.

The scheme — launched last year — had initially allocat­ed Rs 10,000 crore but revised the allocation to Rs 15,000 crore am­id growing demand from sta­tes. The most vocal among the states are West Bengal, Kerala and Tamil Nadu. Prin­cipal chief advisor to West  Ben­gal chief minister and state’s for­mer finance minister Amit Mitra simply dubbed it “anti-federalist.” Tamil Nadu finance minister PTR Palanivel Thiag­arajan called it “pure accounting.”

“The enhanced allocation is seemingly aimed at catalysing overall investment in the economy, but is narrowed down to Gati Shakti and other capital investment of the states. Then, it is further narrowed down by breaking it into different components. 

So, the federalist character of the states on deciding where they would like to put investment in the economy is compromised. It is anti-federalist and reflects an authoritarian and controlling mindset to the core,” said Mitra.

The “components” being referred to include supplementary funding for priority segments of PM Gram Sadak Yoj­ana, including support for the states’ share. They also include digitisation of the econ­omy, including digital payments and completion of optical fibre cable network. Also included are reforms related to building byelaws, town planning schemes, transit-oriented development and transferable development rights.

“It’s dictated to the last pie,” added Mitra.

The allocation for FY22 had three parts, including separate allocations for hilly and non-hilly states, incentives for mo­ne­tisation of infrastructure ass­ets and disinvestment of state public sector enterprises (SPSEs). States like West Bengal and Kerala are also opposed to the fact that the “assistance” is in the form of a loan and not a grant.

“When you look at the country as a whole, Rs 1 trillion is a very small amount. It should have been extended as a grant,” said K N Balagopal, finance minister of Kerala.

Balagopal also pointed out that central tax devolution is down by Rs 15,000 crore this year. Mitra, too, said that devolution is cut by Rs 11,000 crore in 2020-2021. The bone of contention is that while devolution is free of encumbrances, the Rs 1 trillion comes with riders.

“Devolution, which we are open to using according to states’ priorities, has been cut as has centrally-sponsored sch­emes. The assistance being offe­red is completely tied,” said Mitra.

The Tamil Nadu finance minister pointed out that the government has cut down revenue spending in the grants and schemes, and in many of the departments, it’s flat, slightly down, or only marginally up. It’s a case of pure accounting, according to the finance minister. “They have just shifted from grants and schemes to loans. What they have done is taken a bunch of revenue spending out. Therefore, the revenue deficit looks lower and fiscally responsible, shifting it to capex. The capex number looks high and the year-on-year (YoY) capex is shown as a major stimulus to the economy,” he added.

The Centre’s trump card to recovery from Covid is through capital expenditure rather than consumption expenditure. But Sunil Sinha, principal economist, India Ratings, said the mix of capital expenditure on short and long gestation period projects could have been better.

He said, “Three ministries — railways, highways and defence — account for nearly two-thirds of the Rs 7.5-trillion capex, which are long-gestation projects. The short-term and low-gestation projects are generally in the hands of states. So, the allocation of Rs 1 trillion to be spent by the states is a good idea but is somewhat untenable. This is because states may not be able to meet the conditions.”

But some states are cheering and not just the BJP-ruled states. “It is a good step and we welcome it,” said a senior Mah­ar­ashtra government official.

Last year, the state received around Rs 600-crore loan from the Centre under its scheme for financial assistance for capital expenditure. “Initially, around Rs 300 crore was allocated to us, but later the Centre asked us to send another proposal. Thus, we got double the initial quota. The funds were utilised for irrigation and road projects,” he said.

BJP-ruled Karnataka and Gujarat have lauded the move. Karnataka chief minister Basavaraj Bommai said after the Budget, this will help the state get Rs 3,000-3,500 crore of excess capital this year. “Last time, it was Rs 26,000 crore and we may get about Rs 29,000 crore (this year),” he said.

Milind Torawane, secretary — economic affairs — in the government of Gujarat, said, the allocation of 50-year interest-free loans is over and above the normal borrowings allowed to the states. They are to be used largely for PM GatiShakti projects.

“The move does not restrict Gujarat in its capital expenditure. While several big-ticket projects are already part of PM GatiShakti, we have already li­ned up funding for our own projects. We would, therefore, be free to use this funding for our projects while the interest-free loans can be used for projects under PM GatiShakti,” he said.

(With inputs from Ishita Ayan Dutt, Shine Jacob, Asit Ranjan Mishra, Vinay Umarji, Deepsekhar Choudhury, Aneesh Phadnis)