By Anshuman Kamila & Yashaswini Saraswat
Even as the pandemic continues to wreak havoc, the economy is revving towards recovery. April’s Monthly Economic Report (MER) of the Ministry of Finance assesses that recovery from the pandemic-induced economic trough continues unabated, albeit moderate. The State of the Economy in RBI’s Bulletin for May echoes this thought, casting agriculture and IT as two sectors gallantly weathering the COVID storm. However, it is imperative to realise that India has a longer path to walk beyond the pangs of the pandemic. And crises are often opportune moments to take resolute action for a bright future.
More widespread and holistic growth — ultimately leading to equitable distribution of incomes across states — has been a primordial growth objective for the Indian state. This is evidenced from the call for ‘faster and inclusive growth’ agenda of the Twelfth Plan as well as the ‘prosperity with equality’ mantra of NITI Aayog’s Fifteen-Year Action Agenda.
The Economic Survey 2016-17 had documented how per capita incomes across Indian states have diverged in the period 1984-2014. This may be compared with the less affluent countries growing faster than more affluent countries of the world, or less affluent sub-regions surpassing more affluent counterparts in growth rates. A recent working paper hosted by the Institute of Economic Growth explores the phenomenon in greater detail, concluding thereby that differences in growth experiences of ‘rich’ and ‘poor’ states in India is accounted for by the difference in the quantity of growth-enabling factors, such as roads, railways, telecom and banking networks, etc. Ipso facto, bringing states up to an equitable distribution of per capita incomes would require concerted efforts to spread these factors more equitably.
In this regard, the MER discusses the Scheme for “Special Assistance to States for Capital Expenditure”, notified by the Department of Expenditure. Capital expenditure is known to have the highest multiplier effect in the economy, in that the impact of expenditure on stimulating economic activity is higher when it is in the nature of capital outlay. As per a 2013 paper of the RBI, this multiplier effect for capital outlay in India is higher when undertaken at the level of states. Additionally, its role in generating employment and catalysing private enterprise, apart from enhancing the economy’s productive capacity, is particularly salutary in current times of hobbled economic activity.
In line with the fiscal philosophy embedded in the Budget 2021-22 — wherein capital expenditure was imparted an emphatic boost (capital outlay is envisioned to rise phenomenally by 54.%, with that on major infrastructure estimated to grow by a robust 90% — led by the railways, roads and bridges and communications) — this scheme furthers this growth strategy. In the previous fiscal, Rs 11,830.29 crores were released to states, which helped to stay the course on state-level capital expenditure in the pandemic year. In the ongoing fiscal, there is a provision for extending Rs 15,000 crore worth of interest-free loans to states for a period of 50 years. Since equity is at the core of our development paradigm, the horizontal spread of this fund is broadly aligned with their economic imperative — North East and hill states getting an earmarked portion, other states being eligible for funds in proportion to their share of central taxes as per the award of the 15th Finance Commission for the year 2021-22.
In addition to this, a sum of Rs 5,000 crores is designated to be disbursed to states to incentivise monetization/recycling of infrastructure assets and disinvestment of the State Public Sector Enterprises. The underlying rationale being that such monetisation unlocks latent value in assets, cuts down on holding cost, and facilitates the deployment of public purse for new infrastructure projects. By speeding up the National Infrastructure Pipeline and distributing capital assets across the states, the vision of more rapid and better spread out economic growth would come to fruition.
Given the fall in states’ revenues due to the pandemic and the states deeming imprudent to slash revenue expenditure, their capex has been hit (over 11% less than budgeted in FY21 for 13 states analysed by RBI’s State Finances: A Study of Budgets). The aforementioned scheme comes at an opportune time as it enables the states to cater to their long-term investment needs without compromising on the current revenue expenditure requirements. The absence of interest payment liability along with no inflation adjustment of the principal amount for 50 years hence provides an opportunity that the states could well utilise to undertake long term projects – especially related to robust healthcare infrastructure – that meets the present and future needs arising from an ageing population and a dynamically evolving pandemic situation.
(The authors are Assistant Directors (Officer Trainees of IES) in the Department of Economic Affairs, Ministry of Finance. Views are purely personal and not necessarily those of GOI or Financial Express Online.)