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Capital spending by states could slow in FY16: Study

Expected pay revisions of state employees on the lines of the Seventh Pay Commission's award to impact fiscal space for boosting capital expenditure

Enhanced capital spending likely
BS Reporter New Delhi
Last Updated : Feb 02 2016 | 3:00 PM IST
Growth in capital spending by states might slow in 2015-16 as compared to 2014-15, according to a study by ICRA of nine state budgets.

For 2015-16, capital spending was budgeted to grow at a slower 15 per cent as compared to roughly 26 per cent in 2014-15 (revised estimates). Given the large variance between revised estimates and audited state accounts, the gap might be lower.


The fiscal space for boosting capital spending in 2016-17 at the state level might be further constrained in the coming year because of two reasons: The expected pay revisions of state employees in line with the Seventh Pay Commission's award and states taking over the accumulated debt of power distribution companies (discoms) under the central government's UDAY scheme, which would lower the funds available for capital expenditure.

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Of the nine state budgets analysed by ICRA, only Karnataka and Kerala have revised their pay scales in the past few years. Tamil Nadu, Gujarat, Maharashtra, Punjab, Haryana, Rajasthan, and West Bengal carried out pay revisions almost a decade ago. Though the exact impact on state budgets was unclear, the aggregate fiscal space might be constrained in the coming year.

Fiscal space would be further constrained with most states expected to take on 75 per cent of discoms' debts. Assuming that the new debt would be issued at a coupon rate of 8.5 per cent, ICRA said the interest burden on these states would go up by Rs 1,600-5,100 crore. To put this in perspective, the amount would be equivalent to nine to 42 per cent of the interest outgo budgeted by these states for financial year 2016.

While an argument can be made that with the Centre increasing the share of untied tax receipts shared with the states, the states could ramp up spending. But analysts were concerned that while the share had increased, it was largely offset by cuts in centrally sponsored schemes.

Also, there was little clarity over how states were spending the 10 percentage point increase in untied funds after the 14th Finance Commission. This was partly because its recommendations were made public in February, leaving little time for states to readjust budgets.

According to ICRA's estimate, funds transferred by the Centre to states rose by Rs 79,300 crore in the current financial year (April-November) as compared to the year-ago period. But where this money has gone was unclear.

NEGATIVE IMPACT
  • ICRA estimates budgets to grow 15%, compared to 26% in 2014-15 (revised estimates)
     
  • Expected pay revisions of state employees on the lines of the Seventh Pay Commission's award to impact fiscal space for boosting capital expenditure
     
  • Fiscal space to be further constrained as states take on 75% of discoms' debt
     
  • ICRA estimates burden on the nine states surveyed to go up Rs 1,600-5,100 crore as a result of UDAY

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First Published: Jan 27 2016 | 11:25 PM IST

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