The scheme envisages giving ₹1 trillion of 50-year interest-free loans to states, over and above the normal borrowing they are allowed, so that local administrations get more financial resources for building productive assets, which will also add jobs.
Uttar Pradesh, West Bengal, Madhya Pradesh and Bihar have emerged as the biggest gainers from the infrastructure financing scheme announced in the FY23 budget, a person informed about the scheme’s operation said.
“Financing of capital expenditure by states under the scheme is by and large progressing as per plan. So far, the government has sanctioned ₹60,000 crore under the scheme, of which ₹30,000 crore has already been released," the person cited above said on condition of anonymity. The scheme entails ₹80,000 crore to be given based on the Fifteenth Finance Commission (FFC) formula and ₹20,000 crore, which is linked to reforms. The Centre wishes to leverage the scheme to bring reforms at the state level, which would help improve ease of doing business.
An email sent to a finance ministry spokesperson on Wednesday seeking comments for the story remained unanswered at the time of publishing.
While capex disbursement under the scheme has moved smoothly under the FFC formula, reforms by states are an area where things are still moving slowly, something that has prevented the full release of the funds so far, the person added.
However, with the government already allowing states an additional borrowing window of 0.5% of gross state domestic product for carrying power sector reforms, it is expected that several states would pursue broad reforms to access these funds. “Capex spending by states is set to pick up in the second half of the year, following the trend witnessed in central sector projects, especially road and highways, where the pace of construction remained slow in the first half of FY23, continuing on the disruptions caused by the third wave of covid and a prolonged monsoon late into 2021-22. The second half could pick up pace, which would also use up entire long-term capex funds kept by the Centre," said a second person, also on condition of anonymity.
He added that there is a case for the Centre to consider raising this long-term capex funds for states in next year’s budget, given its use and demand.
The FFC’s formula for the devolution of funds is based on principles of need, equity and performance and takes into account factors like population, area and gap in per capita income compared to that of the richest state. Uttar Pradesh, a major beneficiary under the infrastructure financing scheme, also has benefited from the availability of labour in the recent past as many migrant workers who returned to the state during the pandemic are helping in economic activity, the person added.
The amount sanctioned so far shows a fourfold jump from the allocation made in the first year of the scheme— ₹15,000 crore in FY22, indicating it is being well received by states. Given its multiplier effect, infrastructure building is a key part of the government’s strategy for economic growth and is a key element of Prime Minister Narendra Modi’s vision of a new India.
With this in mind, the Centre has also increased allocation under capital expenditure in this year’s budget by a significant 35% to ₹7.5 trillion. The ₹1 trillion capex fund for states forms part of this additional allocation by the Centre.
According to an analysis by Bank of Baroda, states have a tendency to go slow on capex in the initial months and accelerate subsequently when a clearer picture of their fiscal balances is known.
“Therefore, the last quarter could be the busy period for states in reckoning their capex. The GST collections this year have been very buoyant for both the Centre and states, and hence, there is less reason for them to be circumspect at this point in time. Growth does need an equal push from both the Centre and states, and hence, this piece is critical," the BoB report said.
According to the report, capex spending by 26 states in the first four months of the fiscal is concentrated in UP, Maharashtra, Karnataka, Tamil Nadu, Gujarat, MP, Odisha and Rajasthan, which individually have a share of above 5% each and together account for 61.2% of total capex of states. If West Bengal is added with a share of 4.8%, then the nine states would account for 65% of the capex.
