Cash Strapped States, Fiscal Deficit and Infrastructure Expansion

From the previous years' Union Budgets, it is clear that there has been a healthy increase in the budgeted capital expenditure of the central government. Coupled with the planned borrowings by the central government in the first half of the current fiscal year and corporate investments, the budgeted capital expenditure by the central government will provide the required support to the struggling economy in the form of asset creation as well as employment opportunities. This will help in providing the required infrastructure support needed for India's goal of double digit growth and $5 trillion economy but this alone wouldn’t be enough.

The central government’s effort to erect infrastructure across the country needs to be aligned and supported by the state governments. Without their aligned expenditure and political support, the ambitious plan of the central will slow. But a look at the financial conditions of the states doesn’t suggest the same and it is quite visible from the budgets of the states. With the constrained financial capabilities, states wouldn’t be able to spend on the infrastructure projects in the same way and scale as the central government plans. Even their ability to borrow from the market is very limited under the Fiscal Responsibility and Budget Management (FRBM) Act 2003.

Under FRBM Act 2003, the central government needs to limit the fiscal deficit to 3% of the gross domestic product (GDP) by 31st March 2021 and the government’s debt to be restricted to 40% of the country's GDP respectively by 31st March 2025. Similar limits are set for every state under FRBM. It is very difficult for most of the states and the central government to achieve both the targets due to the huge pandemic related expenditures supported by borrowed funds. In the union budget 2021-22, the central government’s projected fiscal deficit stands at 9.5%. Due to coronavirus pandemic, last year even the central government had to increase the borrowing limits of states to 5% of state gross domestic product (SGDP) as escape from FRBM.

The coronavirus pandemic induced blanket national lockdown had crippled down the whole economy with economic activities falling by 70-80% for more than 8 weeks. For more than three quarters, the economy had not been in normal conditions and economic activities had been far lower than the pre-covid period. This has given unprecedented shock to the whole economy impacting the financial positions of the central as well as the state government.

Most of the states were left with very little financial resources to spend during the pandemic times when the states had to invest huge money on the healthcare facilities and supplies and different entitlements for the citizens to provide them with food and other basic needs. On the other hand during this period, states received very little revenues in the form of taxes. It must be noted that due to financial constraints, the central government was also forced to delay the release of the share of states’ tax revenue.

However, the economic activities are back to pre-pandemic levels and the economy is on the road to exit the recession and path of economic expansion but until and unless there are some more reliefs in form increased borrowing limits of 5% for the states as Ways and Means Advances (WMA) wouldn’t be helpful in this, the cash strapped states wouldn’t be able to spend much on capital expenditure and the falling capital expenditure by the states will be the biggest hurdle in achieving the goal of revamping and expanding the infrastructure in India.

Rajeev Upadhyay

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