States must step up capex, says RBI governor Shaktikanta Das

Quality spending can have multiplier effect, says Das

Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday said fiscally prudent states must step up their quality expenditure in a way that it would have a multiplier effect on the economy and would prompt other states to increase their own capital expenditures.

Das stressed that the quality of expenditure by states was important as they incurred 60 per cent of the general government expenditure (the Centre plus state combined), whereas the global average of sub-national spending was just about 30 per cent.

“The state finances and the expenditures by states do play an important role in the growth of the country’s GDP (gross domestic product), and more particularly in current times when India is recovering from one of the worst challenges to its economies,” Das said while speaking at an event organised by the London School of Economics (LSE).

There are a few elements that require perennial and greater attention, more so because of the pandemic, he said.

“First and foremost is that one has to accept that our expenditure on healthcare and education needs to be significantly stepped up, both at the central government level and, more so, at the state government level. The gap in the education and healthcare facilities is something which needs greater focus,” he said, adding that online classes had affected the lower rung of the society which could not afford computers and laptops.
 

Automation would also render low-skilled workers jobless, Das said. These sets of people have to be reskilled so that they continue to be in the job market. “New problems have come up. States and the Centre have to address these issues,” he said.

After the global financial crisis, many states, eager to comply with tight fiscal parameters, had cut down on their capital expenditures. “That should not be repeated again. It is very important that states do not cut their capital expenditure,” the governor said.

The debt to GSDP (gross state domestic product) ratio of all states before the pandemic was 26 per cent, but there was a wide divergence. Debt to GSDP ranged from 17 per cent to 42 per cent across states. While the low debt to GSDP ratio in some developed states is commendable, the RBI governor urged them to spend.

“I feel they have space to step up their expenditure, especially related to infrastructure, education, and health. Because when you can spend in one state, it can kick-start an investment cycle and that can spillover in other states also, which will contribute to the country’s GDP,” he said.

A greater focus on the quality of expenditure has to be given.
 

“The time has come to develop certain measurable parameters to assess the quality of expenditure. All our parameters are quantitative, but it is the quality of expenditure which is very important,” he said.

States’ spending on infrastructure, for example, can have a greater multiplier effect, “which makes a difference to the lives of people in terms of education, health and skills”. In this context, measurable parameters have to be developed.

Governor-speak

• Expenditure on healthcare and education needs to be significantly ramped up
• Automation taking jobs of low-skilled workers; reskilling needed for them
• Developed states with better debt to GSDP ratio must step up expenditure
• Quality of expenditure should be good; there should be multiplier effect
• Schemes must have a sunset date, must be closed after the need is over

It is also important to review all existing schemes to see which of them have outlived their utility and need to be discontinued.

“Once initiated, one scheme cannot have a permanent life. Once the quantifiable targets are reached, the scheme should be withdrawn. Or, if the targets are not being achieved, then there is something wrong with the scheme, and the programme needs to be modified,” he said.

The RBI governor also stressed on prudence in public expenditure. States are battling competing demands, but they must also undertake an evaluation of such demands, he said. “The decision to select one particular scheme over the other is the assessment of the state government on what kind of multiplier effect it will have, and what kind of impact it will have on the lives of the people.”

“The multiplier effect and the outcomes need to be properly assessed before it is launched, and every new scheme launched should have a sunset date. There should be a mechanism for a rigorous and hardcore review about the scheme, whether it has succeeded, or it has not succeeded, or it needs to be suitably modified because it is hitting the wrong target,” the RBI governor said.

In his speech, the governor also said traditionally Finance Commission reports of the Centre were much more detailed and analytical than those of the states.

“Unfortunately, the mechanism of the state finance commissions has not worked as efficiently and as promptly as the Union finance commission. Although the constitutional provisions for both the finance commissions are identical, there are delays in the formation of state finance commissions. With regard to the quality of the report, the Union finance commission reports historically have been far stronger and much more analytical than those of the state finance commissions,” he said, adding that this was one area that needed improvement.