States to get Rs 15,000 cr more from Centre to boost capital expenditure

In a bid to boost capital spending by states and nudge them to monetise their assets, the Centre will provide an additional Rs 15,000 crore as interest-free 50-year loan to them. This is in the wake of the economy facing headwinds on account of a second Covid wave.
 
The funds provided to states under the scheme will need to be used for new and ongoing capital projects, and to settle pending bills for ongoing capital projects.
 
Besides the amount earmarked for North East and other states, Rs 5,000 crore has been allocated to incentivise states for monetisation of their assets and divestment of state public sector enterprises.

 

Of the Rs 5,000 crore allocated, states will receive 50-year interest-free loans, ranging from 33 per cent to 100 per cent of the receipts through asset monetisation, listing and disinvestment of state PSUs.
 
“Monetisation of assets unlocks their value, eliminates their holding cost and enables scarce public funds to be deployed to new projects, thus speeding up the implementation of the National Infrastructure Pipeline,” the ministry of finance said in a statement on Friday.
 
An amount of Rs 2,600 crore has been earmarked for hilly and northeastern states, of which, Assam, Himachal Pradesh and Uttarakhand will get Rs 400 crore each. Others in this group have been allocated Rs 200 crore each.

 
Around Rs 7,400 crore will go to the remaining states in proportion of their share in central taxes.
 
The scheme is in continuation to last year's 50-year Rs 12,000-crore interest-free capex loan provided to states to be spent on new or ongoing capital projects. States could settle bills of contractors and suppliers by making payments before March 31, 2021. Of that, a sum of Rs 11,830.29 crore was released to the states.
 
“This helped sustain state-level capital expenditure in the pandemic year. In view of the positive response to the scheme and considering the requests of state governments, the Centre has decided to continue the scheme in the year 2021-22,” finance ministry said.

 
It added that capital expenditure creates employment, especially for the poor and unskilled, has a high multiplier effect, enhances the future productive capacity of the economy, and results in a higher rate of economic growth.
 
The overall objective of the scheme is to nudge states to start asset monetisation, said N. R. Bhanumurthy, vice-chancellor at Bengaluru’s Dr B.R. Ambedkar School of Economics (BASE) University.
 
Once states start realising that asset monetisation can be a major source of non-tax revenue, they would come forward in pooling more assets for monetisation, he added.
 
“However, the entire scheme would push states to undertake capital expenditure to the tune of Rs 20,000 to Rs 30,000 crore, depending on the extent of asset monetisation done.

 
Since states would receive 33 per cent to 100 per cent of asset monetisation or disinvestment receipts as interest-free loan, the maximum asset sale they can undertake is around Rs 15,000 crore (if 33 per cent of the value realised by selling assets is given as interest-free loan). This would also be subsequently used for capital expenditure,” Bhanumurthy said.
 
Madan Sabnavis, chief economist, CARE Ratings, said, the Part III (asset monetisation) is the novel aspect this time which nudges states to go for sale of assets. “It will be interesting to see how states fare on this count as some of them have been talking of such sales in the past but have not taken affirmative action in a significant way,” said Sabnavis.

 
Aditi Nayar, chief economist at ICRA Ratings, said that the additional funding under the interest-free loan to states for capex was welcome, despite its modest outlay.
 
“Higher and faster capital spending by the Centre and state governments remains one of the upsides to the GDP growth expected in FY22, in light of the rising Covid cases and localised restrictions,” said Nayar.
 
The finance minister, in her Budget speech, announced that the Centre would take measures to nudge states to spend more on infrastructure and incentivise disinvestment of their public sector enterprises. Budget analysis of 17 major states, which account for about 87 per cent of India’s GDP, showed that they have budgeted about 15 per cent growth in total expenditure in the fiscal year 2021-22.

 
This is against a muted 1 per cent growth of the central government over the previous year.

HELPING HAND

• 50-year interest free loans to be granted to states to boost capex
• Rs 2,600 crore earmarked for hilly and north eastern states
• Rs 7400 crore allocated to remaining states in proportion to their share in central taxes
• Rs 5,000 allocated to incentivise for asset monetisation, stake sale in state PSUs
• Scheme is an extension to last year’s special assistance to states that provided interest free loans for capex