RBI report: States to re-prioritise revenue spends; sharp cutback in capex on the cards

Over the past decade, States have been cutting back their capital expenditure significantly to rein in their fiscal deficit. With Covid-led disruptions leading to large shortfalls in revenues receipts and rise in revenue expenditure, States are expected to cut back on capex spend more significantly this fiscal, according to the RBI Annual Report on State Finances: 2020-21.

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States have cut back capex by almost 0.5 per cent of GDP in recent years; the cut in 2019-20 was the steepest at 0.6 per cent of GDP. The pandemic-led disruption in capex activity in the first half of this fiscal and steep shortfall in revenues is expected to lead to deeper cuts in capex spend in 2020-21 (in relation to what was budgeted earlier in the year).

An analysis of data put up by the RBI shows that in 2020-21, the total capital expenditure (capital outlay plus loans and advances by States) for all States put together was expected to be about 12 per cent higher than in 2019-20 (revised estimates). In 2019-20, States had fallen short of their budgeted capex spend by 7 per cent.

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In 2019-20, out of the 31 States and UTs, 15 had seen a lower capital outlay (CO) to gross State domestic product (GSDP) ratio vis-à-vis 2018-19. In the current 2020-21 fiscal, 18 States and UTs had budgeted an increase in CO/GSDP ratio, which now seems unlikely.

Capex challenges

Globally, India has the highest decentralisation of capital expenditure (ratio of States’ capex to general government capex), according to the RBI report. While capex decentralisation ratio is about 65 per cent in India, it is much lower in countries such as Malaysia (5 per cent), Brazil (around 28 per cent), and Mexico (30 per cent). However, developed countries such as the US (around 56 per cent), Germany (48 per cent), and Canada (about 60 per cent) also have high capex decentralisation.

Capital spending in India has been falling short of the budgeted targets, as States have cut back on capital expenditure to rein in fiscal deficit (owing to lower revenue accretion).

Andhra Pradesh, Gujarat, Madhya Pradesh, Rajasthan, Telangana and West Bengal were some States that saw lower CO/GSDP ratio in 2019-20 vis-à-vis 2018-19. Most of these States had pegged in a higher capital outlay to GSDP ratio in the current 2020-21 fiscal.

But owing to the Covid-led lockdown and monsoons in the second quarter, States have not been able to start much capex in the first half of this fiscal. The focus in the first half has been on capex in health and education sectors in response to the pandemic, and other critical sectors like roads and construction may draw attention in H2, according to RBI.

To drive capex, the Centre also recently announced a special interest free 50-year loan to States for capital expenditure of ₹12,000 crore to be spent till March 2021. But it represents a small fraction of the budgeted capex of ₹6.5-lakh crore.

Rationalising revenue expenditure

Meanwhile, States have been re-prioritising revenue expenditure by curtailing some spending — DA freeze, deferment of part or full salaries and wages and deduction from salary, etc.

Alongside the Centre, State governments have been undertaking policy measures to contain the impact of the pandemic — insurance cover for doctors and nurses; purchase of medical equipment and tools; hospital arrangements with a sufficient number of beds for Covid-19 patients; providing food free of cost; cash for those who are not availing of any government schemes; cash for registered construction workers; remitting a fixed sum for those trapped abroad in other States; and advance salary and pension payments, according to the RBI report.