Budget 2022: Where States Can Spend The Rs 1 Lakh-Crore Capex Allocation

With investment and infrastructure being the mantra for this budget, states are expected to see an increase in grants-in-aid

<div class="paragraphs"><p>Picture for representational purposes.  </p></div>
Picture for representational purposes.

The states, struggling with power distribution losses and subsidy burden, received a capex allocation in the budget for 2022-23.

Capital expenditure in the Union Budget 2022 was increased by 35.4% from Rs 5.54 lakh crore in 2021-22 to Rs 7.5 lakh crore in 2022-23. And that includes Rs 1 lakh crore in loans to states.

But the states will not directly receive the amount set aside for capex, according to HK Amarnath, associate professor at the National Institute of Public Finance and Policy.

States get funds from the centre through devolution and grants-in-aid. These come under three different categories of grants from central government, finance commission; and grants for other central sector schemes including externally aided projects, he said.

The increase in capex earmarked in the budget, he said, “will be spent on major infrastructure projects like national highways, railways and shipyards which are under the central government and located in different states. "Essentially, the spending will happen in the states but not through the state governments.”

What the states are expected to receive is an extension of the ‘Scheme for Financial Assistance to States for Capital Investment’.

An official from the state of Karnataka with knowledge of the matter said the scheme was announced in 2020-21. It is a long-term loan that the central government takes on behalf of the states, which receive this as a 50-year interest-free loan from the centre, he said.

The states can then use this amount on various infrastructure projects in line with the Gati Shakti Mission as outlined by the finance minister in her budget speech.

The central government is "certainly trying a level of hand-holding" with states, NR Bhanumurthy, vice chancellor at the BR Ambedkar School of Economics, told BloombergQuint. "This has continued from last year, ever since Covid-19."

Amarnath said direct allocations have also risen for centrally sponsored schemes (under central government grants) including the National Health Mission, Pradhan Mantri Gram Sadak Yojana and Pradhan Mantri Awas Yojana.

Still, according to Amarnath, these grants-in-aid are lower than in the past. "This doesn't mean they (central government) have cut down on anything or that the states are losing out," he said. "It's just lesser than last year in proportion."

He sees room for higher grants-in-aid as tax revenue projections have been conservative, given the tax inflow and GST revenue in the last 4-5 months.

Quality Of Devolution Funds Improves

The devolution amount, at 41% of central taxes, is given to states in 14 instalments over 12 months. While the share remains unchanged, the composition has changed in favour of the states, Bhanumurthy said. "We can see that the share of untied grants has increased," he said, referring to funds that can be used by states as they deem fit.

Ailing State Finances

The states' finances are hurt by two "heavily eating sectors", Amarnath said, citing discom losses and road transport corporations.

States are increasingly spending on "freebies" or monetary benefits that don't enhance the economic activities, he said. These funds, he said, could be alternatively invested in building labour and talent.

Bhanumurthy said non-merit subsidies, where usage charges are below the cost of providing the service such as water supply, cause state expenses to pile up.

States also face another challenge as compensation cess, levied to make up for the loss of revenue for states, is set to lapse in 2022. Several states have sought an extension and the matter will be discussed in the next GST Council meeting later this month.

(Updates an earlier version with more comments from Amarnath)