States are in a much better position to push capital expenditure quickly, and execute smaller ticket projects dispersed across the country, said Finance Secretary TV Somanathan.
“The Center operates on certain big axis projects like national highways, railways, pipelines, telecom, that has its own value, but this (state-level capex) has a greater geographical spread and a greater diversity of projects. So, it has a good chance of being effective. So, we thought that in this push, some portion must be done through states,” Somanathan told The Indian Express.
In fact, the Union Finance Ministry consciously reached out to states as part of a nuanced strategy in the run-up to Budget 2022-23. In the meeting with states ahead of the Budget, the states’ reaction was quite positive. “They said give it to us and we will use it,” Somanathan said. Besides translating into quicker action on the ground, state projects benefit the small and medium enterprises more.
The Union government is expecting the thrust on public investment through states to have a greater multiplier effect given that they might spend less on health and more on capex in the coming year. The Finance Secretary said a policy choice must be made between little less of expenditure or more of fiscal consolidation or a little less of consolidation and more of expenditure. But either way, he said, private investments are not yet at a stage where interest rate sensitivities would be a key unearth.
“If we reduce the expenditure and fiscal deficit, perhaps it will get a lower cost of borrowing. Is that going to drive a sufficient quantity of investment? Is the crowding out such that by reducing borrowing, more private funds will be available and they will invest? We weren’t convinced that would happen in the current scenario. Yes, there will be a marginal increase in the borrowing cost, that will filter through to the private sector also. But those projects in the private sector that are being planned, I don’t think they are so interest rate sensitive that 0.25 per cent change will make them drop the project. If they were so rate sensitive, in the last two years when the rates were so low, we should have seen a surge in private investments. It was not there,” Somanathan said.
Spending, according to the Finance Secretary, will create a better growth impact, even with some borrowing impact. “At the margin, we have to consolidate. There’s no question of remaining at 6.9 per cent. But there is a pace of consolidation… We felt that spending will create a better growth impact, even with some borrowing impact. I don’t think we are in a crowding out situation because private investment intentions are not so buoyant that they are waiting to use these funds. They are not struggling to get funds; banks are also sitting on a lot of money that they can still lend. So, crowding out is less of a risk now was the judgement. And growth will be better off with a slightly higher deficit,” he said.
For 2022-23, Finance Minister Nirmala Sitharaman sharply hiked the capital expenditure budget by 24.47 per cent to Rs 7.5 lakh crore (compared with the Revised Estimate for 2021-22 at Rs 6,02,711 crore), which is almost 2.9 per cent of the GDP. The borrowing limit of states has been hiked to 4 per cent of GSDP and states have been provided for 50-year interest-free loans up to Rs 1 lakh crore in 2022-23. In 2021-22, the Center had allowed states an additional Rs 15,000 crore for capital investment under a similar window.
“It has proved very successful in year 1 and year 2. We gave Rs 12,000 crore in one year, and Rs 15,000 crore in year 2. In both years it has been very quickly and effectively spent by the states. It has been welcomed by the states. There was feedback from the states that it was very useful to them to preserve capital expenditure during the pandemic, please continue and increase,” Somanathan said.
Incidentally, Moody’s Investors Service Friday said the focus on capital expenditure supports near-term growth but poses challenges to longer-term fiscal consolidation. “Continued government spending on infrastructure projects will drive demand for key user industries, a credit positive. In fiscal 2021, the government spent 11% more than budget estimates on highways and 9% more on railways. The increase in public investment helps to address infrastructure constraints and support future private investment,” it said.
The Finance Secretary said the multiplier effect will be far greater in case of higher expenditure than through generation of demand through cash transfers. The capex proposal also includes urban projects which will help in creating jobs for the urban unskilled, he said. “A proportion of this capital expenditure to states will also be for urban. There is a component, which has specifically an urban component there. That has been tied to some reforms in building laws and so on, but it is intended for generating urban projects. Amrut 2.0 has been launched. There is a considerable increase in it. We have a few easy to meet reform criteria,” he said.
For urban capacity building, the Budget had announced support to the states. “Modernization of building byelaws, Town Planning Schemes (TPS), and Transit Oriented Development (TOD) will be implemented. This will facilitate reforms for people to live and work closer to mass transit systems,” Sitharaman had said.