Capex by States

  • November 18, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Capex by States

Subject: Economy

Context:

The central government has sanctioned ₹60,000 crore of long-term capital expenditure funds to states.

Concept:

Scheme Special Assistance to States for Capital Investment

  • Under this Scheme, financial assistance is provided to the States Governments in the form of 50-year interest free loan for capital investment projects.
  • For the 2022-23 Financial Year (FY) a total financial assistance of Rs 1 lakh crore would be given to states.
  • The loan under the scheme would be over and above the normal borrowing ceiling allowed to states for FY 2022-23 and should be spent in the same year.
  • This allocation will be used for PM Gati Shakti related and other productive capital investment of the States including components for:
    • Supplemental funding for priority segments of PM Gram Sadak Yojana, including support for the States’ share,
    • Digitization of the economy, including digital payments and completion of OFC network, and
    • Reforms related to building bye laws, town planning schemes, transit-oriented development, and transferable development rights.
  • 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 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.

15th Finance Commission on Fiscal roadmap

  • Fiscal deficit and debt levels:
    • The Centre brings down the fiscal deficit to 4% of GDP by 2025-26.
    • For states-(i) 4% in 2021-22, (ii) 3.5% in 2022-23, and (iii) 3% during 2023-26.
  •  If a state is unable to fully utilise the sanctioned borrowing limit as specified above during the first four years (2021-25), it can avail the unutilised borrowing amount (calculated in rupees) in subsequent years (within the 2021-26 period).
  • Extra annual borrowing worth 0.5% of GSDP will be allowed to states during first four years (2021-25) upon undertaking power sector reforms including: (i) reduction in operational losses, (ii) reduction in revenue gap, (iii) reduction in payment of cash subsidy by adopting direct benefit transfer, and (iv) reduction in tariff subsidy as a percentage of revenue.
  • The Commission observed that the recommended path for fiscal deficit for the centre and states will result in a reduction of total liabilities of: (i) the centre from 62.9% of GDP in 2020-21 to 56.6% in 2025-26, and (ii) the states on aggregate from 33.1% of GDP in 2020-21 to 32.5% by 2025-26.
  • It recommended forming a high-powered inter-governmental group to: (i) review the Fiscal Responsibility and Budget Management Act (FRBM), (ii) recommend a new FRBM framework for centre as well as states, and oversee its implementation.
  • Revenue mobilisation:  Income and asset-based taxation should be strengthened.  To reduce excessive dependence on income tax on salaried incomes, the coverage of provisions related to tax deduction and collection at source (TDS/TCS) should be expanded.  Stamp duty and registration fees at the state level have large untapped potential.  Computerised property records should be integrated with the registration of transactions, and the market value of properties should be captured.  State governments should streamline the methodology of property valuation.
  • GST: The inverted duty structure between intermediate inputs and final outputs present in GST needs to be resolved.  Revenue neutrality of GST rate should be restored which has been compromised by multiple rate structures and several downward adjustments.  Rate structure should be rationalised by merging the rates of 12% and 18%.  States need to step up field efforts for expanding the GST base and for ensuring compliance.
  • Financial management practices: 
    • A comprehensive framework for public financial management should be developed.
    • An independent Fiscal Council should be established with powers to assess records from the centre as well as states.
    • A time-bound plan for phased adoption of standard-based accounting and financial reporting for both centre and states and eventual adoption of accrual-based accounting.
    • The centre as well as states should not resort to off-budget financing or any other non-transparent means of financing for any expenditure.
    • A standardised framework for reporting of contingent liabilities should be devised.
    • Both centre and states should strive to improve the accuracy and consistency of macroeconomic and fiscal forecasting.

States should amend their fiscal responsibility legislation to ensure consistency with the centre’s legislation, in particular, with the definition of debt.

Capex by States economy