Paper: GS – III, Subject: Economy, Topic: Fiscal policy and budgeting, Issue: Implications of the central assistance to states.
Context:
Centre’s assistance through capex loans on the states’ capital expenditure amid rising revenue deficits and limited borrowing space.
Key Highlights:
States Covered:
- 17 major states excluding: Arunachal Pradesh, Assam, Bihar, Goa, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Tripura, and Sikkim. These 17 states contribute to 90% of India’s GDP.
Key Fiscal Trends (FY2025 PA vs FY2024):
Role of Centre’s Capex Loan Scheme:
- Loan Disbursement: ₹1.5 trillion disbursed by Centre in FY2025, up from ₹1.1 trillion in FY2024.
- States’ Dependency on Capex Loans: 17 states received an estimated ₹1.13 trillion in FY2025 via capex loans (up from ₹0.8 trillion in FY2024). Capex loans funded over 40% of the incremental capital spending in FY2025.
Fiscal Challenges Faced by States:
- Limited Borrowing Space: High revenue deficits limit space for productive capital spending. In many states (e.g., Maharashtra, MP, Tamil Nadu), capex was front-loaded in March 2025—implying dependence on late-year borrowing.
- Mismatch Between Borrowing & Spending: Combined capex in March 2025 was much higher than earlier months, due to delayed release of funds and tight market borrowing space.
- Widening Fiscal Deficit:
- Combined fiscal deficit rose to ₹9.5 trillion (3.2% of GSDP) from ₹8 trillion (2.9%) in FY2024.
- Driven by a near doubling of revenue deficit to ₹1.1 trillion (0.7% of GSDP) from ₹0.4 trillion (0.4%).
- Capex vs Revenue Expenditure: Capex formed only 78% of the total spending in FY2025 PA, compared to 80–90% in FY2022–24. States spent ₹7.4 trillion in capex (₹678 billion more than FY2024), but increase was less than budgeted estimates (₹910–1,120 billion).
- Revenue Implications:
- Higher revenue deficit leads to inefficient expenditure patterns. Capex growth remains reliant on Central support, limiting states’ fiscal autonomy.
- Budget estimates for FY2026 need to consider reduced average capex growth and high dependence on centre.
Recommendations:
- Enhance State Fiscal Discipline: States must contain revenue deficits to make room for capital investments.
- Recalibrate Capex Planning: Avoid front-loaded or year-end rushed spending; aim for steady execution through the fiscal year.
- Review Capex Loan Scheme Design:
- Consider conditionality and incentives for efficient utilisation of funds.
- Encourage sustainable capital expenditure practices.
- Broader Fiscal Consolidation Roadmap: A medium-term strategy balancing fiscal prudence and growth should be adopted.
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