Loan interest

Center could add riders to one-third of Rs 1 trillion capital expenditure loan to states

The Center may impose certain conditions on the release of a portion of the 50-year interest-free loans to state governments for their capital expenditures.

In the FY23 budget, Finance Minister Nirmala Sitharaman announced Rs 1 trillion support to states to ensure that the momentum of capital spending is not lost due to a likely shortage of funds after Goods and Services Tax (GST) revenue coverage ceases effective July 1. 2022.

The capex support is considered sufficient to cover any shortfall in states’ GST revenue in FY23 relative to the protected level. The support will go beyond their borrowing limit of 4% of gross state domestic product (GDP).

“Some 65 to 70% of the aid (interest-free loan for capex) to the States will be granted to them for projects identified by them, without any conditions. The remaining 30-35% will be linked to specific reforms and other budgetary achievements,” an official source said.

The funds to be distributed among the states will be proportional to their share of central taxes in accordance with the allocation of the 15th Finance Commission, he added.

“States have been asked to remain ready for the projects given that the amounts to be disbursed are significant and their spending capacity must be ensured. The Center wants to disburse the funds to the states as soon as possible so that the deployment of capital expenditures is not delayed,” another official said. Project preparation is important because funds will be transferred for individual projects, not in lump sums, he added.

“Since the funds are for capital expenditure, I don’t think there is any need to further restrict (their release),” said NR Bhanumurthy, Vice Chancellor of Dr BR Ambedkar University of Economics. Bengaluru.

While “reforms” to be tied to special state investment assistance are still being finalized for FY23, sources said they could include measures on asset monetization, urban plans, etc. “Our position on (the terms) will depend on what kind of reforms are stipulated,” a senior Kerala government official said.

Out of Rs 15,000 crore earmarked for 50-year interest-free special assistance to states for FY22, the Center originally stipulated for a state to be eligible for one-third of its share, it must monetize/recycle the assets of infrastructure and sell its stakes in state-owned public sector companies. However, these found no takers as states stressed that they had limited scope when it came to monetizing and divesting assets. The Center then removed these conditions and released funds for projects identified by states in FY22.

The Center believes that capital expenditure creates jobs, especially for the poor and unskilled, has a high multiplier effect, improves the future productive capacity of the economy, and results in a higher rate of economic growth.

The main consideration for such provision of capex by states is that the Center alone may not be able to spend as much as necessary on asset creation. In addition, the projects handled by the Center — railways, roads, telecoms, etc. — are not necessarily evenly distributed across the territory.

The Centre’s budgetary investments for the next financial year are set at Rs 7.5 trillion, up 36% from the revised estimate for the current year, although its total expenditure is expected to increase by a very modest 4.6%, which signifies a desire to improve the “quality” of spending.

The Center had authorized states to take net contingent market borrowings of 1% of GDP each on 5% and 4.5% of GDP set for FY21 and FY22, respectively. The objectives were to help States fill the resource gap due to the negative impact of Covid-19 and to improve the quality of spending.

For FY22, 50 basis points of the borrowing limit was tied to meeting investment objectives, while an additional 50 basis points were reserved for states that improve corporate governance of their distribution businesses. electricity and reduce the looting of power supplies. For FY23, states can borrow up to 4% of the GSDP, 0.5% of which will be tied to improving the health of electric discoms.

In addition, the state-owned PFC-REC began implementing a loan package of Rs 1.35 trillion in FY21 for discoms, much of which was related to the implementation of reforms such as liquidation of dues and subsidies by state governments, installation of smart meters, improvement of operations and financial efficiency, etc.