States were becoming increasingly autonomous on funding pre-pandemic

Some were even on the verge of reducing central liability to zero

State governments were reducing their dependence on central government debt ahead of the Covid-19 pandemic.

Loans and advances from the centre had dropped from 4.6 per cent of outstanding liabilities in March 2016 to 3 per cent by March 2020, shows Reserve Bank of India (RBI) data. This declining trend has reversed following the impact of the pandemic on state finances.

The government’s offer of additional loans to states for capital expenditure has faced some state government ire on the grounds of the conditions attached. This reportedly includes a bar on pre-payment for the loan tenure of fifty years. States with outstanding loans to the centre require central permission for additional borrowings. These additional loans are being seen as having the potential to affect the sovereignty of state governments since they would be unable to make borrowings without a nod from the centre for 50 years.

Most state governments already have some outstanding loans to the centre but this had been reducing over time, according to an earlier Business Standard report. It had pointed out that some states had been on the verge of completely wiping out their debt to the centre. This is in line with a broader trend over the last few decades when state governments have grown less dependent on the states.

“The outstanding liabilities of State Governments indicate that there is a compositional shift in the outstanding debts component. The share of Central loans in the total outstanding debt of the States has declined from 57.4 percent in 1991 to 6.6 percent in 2013-14 (budget estimates),” noted the 14th Finance Commission report.

“We were alerted to the possibility that, in future, no state may have debt outstanding to the union government, due to discontinuance of intermediation of loans...in such an event, the union would be deprived of its ability to enforce fiscal rules on the States under Article 293 (3) of the Constitution. We examined the relevant facts and observed that, as of now, this contingency will not arise up to 2030, except in respect of two States where it will arise by 2025,” the 14th finance commission had said.

The government had sanctioned the additional trillion rupee arrangement as a means of boosting capital expenditure at the state level.

“For 2022-23, the allocation is Rs one lakh crore (Rs one trillion) to assist the states in catalysing overall investments in the economy. These fifty-year interest free loans are over and above the normal borrowings allowed to the states,” said finance minister Nirmala Sitharaman in her February 1 budget speech.

A look at the state government capital expenditure over the years broadly shows a rising trend. The state governments’ budget estimates indicate a Rs 8.8 trillion capital expenditure plan for 2020-21. The central government’s budget estimate on capital expenditure was Rs 5.5 trillion. The latest state government number is 7.6 per cent higher than the previous year (see chart 2).

The fall in growth 2017-18 appears to have been driven by a few states. Punjab, Tamil Nadu and Uttar Pradesh all saw a rise in capital expenditure in 2016-17 around the time of their state elections. This number then fell in the following year.