States given capital expenditure targets tied to interest-free loans

If target missed, part of loans to be deducted in 2024-25

For the first time ever, the Centre has tied part of the Rs 1.3-trillion capital expenditure (capex) support to states with their capex targets. These capex targets, for the approaching financial year (2023-24, or FY24), have been set by the Centre itself.

If any state fails to meet these capex targets at the end of FY24, then part of the long-term interest-free capex loans given to it by the Centre will be deducted in 2024-25 (FY25), according to the guidelines sent by the Ministry of Finance’s Department of Expenditure to states in February. 

“We had given states provisional capex targets earlier, in 2021-22, during the pandemic. They were tied to their borrowing. This is the first time we are giving states capex targets, based on which a portion of the Rs 1.3-trillion support will be given to states,” a senior government official told Business Standard.

To revive economic activity, states were told to push capex during Covid-19, on the basis that they would be permitted by the Centre to borrow more from the markets.

The capex targets given to states by the Centre for FY24 are not tied to borrowing. Also states’ capex targets, whether set by the Centre or presented by states in their Budgets, should exclude the support given by the Centre.

The targets have been arrived at based on states’ capex in 2021-22 and assuming a normative growth rate of 10 per cent for 2022-23 (FY23) and FY24, the Centre said in its guidelines to states, sent in February.

The biggest target has been given to Uttar Pradesh, followed by Karnataka, Maharashtra, Madhya Pradesh, Tamil Nadu, Telangana, and Gujarat.

In most cases, the capex targets set by states, in their recent Budgets for FY24, are higher than what the Centre has set for them.

“It is encouraging that states have set ambitious capex targets. But we will go by what they have spent by the end of the coming fiscal year,” said a second official.

As reported earlier, the central government has placed strict conditions on states to avail of the Rs 1.3 trillion in long-term loans for their capex needs in FY24, in a bid to ensure effective utilisation of funds.

Of the Rs 1.3 trillion, Rs 1 trillion will be ‘untied funds’; the rest will be tied to specific purposes like scrapping old government vehicles, urban planning reforms and actions, housing for police personnel, constructing unity malls, etc.

Even in untied funds, there are conditions to ensure that the money is effectively spent by states on capex projects. The untied amount of Rs 1 trillion will be divided into three equal instalments of roughly Rs 33,333 crore each.

It is the third tranche to which states’ capex targets are tied to. The third instalment will be given on spending 75 per cent of the first two instalments and 45 per cent of states’ respective capex targets for FY24.

The first instalment will be given to states after their capital projects are approved, and if any amount given to them from the current fiscal year’s (FY23) capex support is still pending after April 1, that amount will be deducted from the first tranche.

The second tranche will be given once states have spent at least 75 per cent of the first instalment.

The Centre has told states that should any state avail of the third instalment based on capex until September 30, 2023, but later fails to meet the FY24 capex target, the entire share of the third instalment given to it will be deducted from either its borrowing ceiling or from the scheme in FY25, if the capex support scheme is continued that year.