States Capex Booster May Fall Short This Fiscal

The Indian economy risks missing out on an expected boost from capital expenditure as states may fail to fully utilise the Rs 1 lakh crore worth of interest-free loans.

Till October, Rs 60,300.7 crore has been approved as additional loans to states as part of the central government's capital expenditure scheme, according to data from the Ministry of Finance. Yet, only Rs 28,400.6 crore has been released so far.

Spending is expected to improve in the second half as states usually follow the wait-and-watch policy and accelerate capex only in the last quarter, Rajani Sinha, chief economist at CareEdge, told BQ Prime. "While I wouldn't say they would miss the target yet, given the levels at the end of H1, it looks (achieving the target) difficult."

A ramp-up in state capital expenditure is crucial to support India's nascent economic recovery when central government spending has eased but private investments show signs of a pick-up. The interest-free loans to states are part of Rs 7.5 lakh crore budgeted capex for this fiscal.

The loans worth Rs 1 lakh-crore are split in two categories. The first one comprises Rs 80,000 crore that would be split based on the devolution formula or the states' share in central taxes. The remaining Rs 20,000 crore is tied to PM Gati Shakti, PM Gram Sadak Yojana, digitisation, optical fibre cable projects, urban reforms, disinvestment and monetisation.

The current pace is "disappointing", said Sinha, who expected it to pick up on the back of interest-free loans and early release of devolution instalment in August. While total state capex has improved from the sharp contraction in the first quarter, it's still contracting year-on-year, which is a concern, she said.

India's capex expenditure stood at a little over 37% in the first half ended September.

Aditi Nayar, chief economist at ICRA Ratings Ltd. is optimistic of a ramp-up in the second half. The first part of Rs 80,000 crore may encourage states to avail the interest-free loans given their differing spending priorities, she said.

While states including Andhra Pradesh, Gujarat, Karnataka, Kerala, and Telangana have not budgeted any spending under the capex loan scheme, it makes sense for them to borrow interest-free money as rates rise, Nayar told BQ Prime.

Gaura Sen Gupta, India economist with IDFC First Bank, also sees back-ended pickup going by past expenditure pattern. From April to August, states have spent around 20% of budgeted capex, similar to the trend in the last three years, she said.

Moreover, states won't face revenue constraints and they were sitting on a cash surplus at Rs 2.1 lakh crore as on Nov. 4, including holdings via 14-day treasury bills and auction T-bills.

Tax collections of states, too, rose 33.8% year-on-year from April to August, and they have also received GST compensation arrears (payable till May) of Rs 86,900 crore, Gupta said.

To encourage capital spending, the central government also front-loaded the tax devolution to states in August and November, paying twice the usual amount.

While states are running against time to avail the benefit this year, the government is also considering to continue the capex scheme with an even bigger allotment next fiscal, the Financial Express and Business Standard reported.

BQ Prime awaits the Finance Ministry's response to emailed queries.

Still, it signals that the central government will retain capex as a key element in its arsenal to support the economy.