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Union budget proposals for FY23 will have a positive impact on the development of state infrastructure and push economic development, India Ratings and Research (Ind-Ra) said in a report on Tuesday.
The budget has provided a capital outlay of ₹1 trillion under the ‘Scheme for Financial Assistance to States for Capital Investment’. States are allowed a fiscal deficit of 4% of GSDP in FY23, in accordance with the recommendations of the 15th Finance Commission. The capital outlay extended by the union government is over and above this limit.
State governments play a significant role in bolstering a country’s growth potential/performance through the creation of capital assets, Ind-Ra said.
Tax devolution combined with the enhanced capital outlay will add to the fiscal space available for states to incur capex in FY23, it added.
States have to undertake reforms in certain key areas to be able to channelise borrowings over and above the 3.5% fiscal deficit/GSDP ratio.
Based on the historical track record, states in aggregate have incurred a higher level of capital expenditure than the union government. The share of capex by states averaged 2.7% of GDP, as against the union government’s share of 1.7% during FY16-FY20.
Despite the covid-19 led lockdown and continued restrictions that halted capital works in the first year of the pandemic, capex by states was higher at 2.6% as per FY21 revised estimate (RE) than 2.2% of GDP (FY21 actual) by the union.
Furthermore, states in aggregate incurred a higher proportion of their expenditure on capex (16.7%) than the union’s share of 13.3%, on average, during FY16-FY20, the ratings agency said.
The Centre provided a capital outlay of ₹150 billion to states in FY22RE against the budget estimate of ₹100 billion under the financial assistance scheme. This assistance is by way of 50-year interest-free loans and these are specifically tied to be used for PM GatiShakti and other related schemes, rural roads, digitisation and urban sector reforms/development. The union government has increased the allocation under this scheme further to ₹1 trillion for the year 2022-23.
Against the FY22BE of ₹13.39 trillion, the union government has allocated a higher amount of ₹15.49 trillion as total transfers to states as per FY22RE, in view of the disruptions brought on by the severe second covid wave. This is an increase of 15.7% over FY22BE and 22.1% over FY21 (the growth coming in at a seven-year high). In FY23, unless India experiences another brutal covid wave similar to the second wave, a severe disruption to economic activities is unlikely, Ind-Ra said.
Consequently, the union government has budgeted for a transfer of ₹15.56 trillion to states, a marginal rise of 0.4% over FY22RE.
The increase in transfers/grants to states in FY22RE was majorly led by the “Back-to-Back Loans to States in lieu of GST Compensation Shortfall" of ₹1.59 trillion. In FY23, the total grants are budgeted at ₹7.39 trillion, down from ₹8.05 trillion in FY22RE.
Ind-Ra said that it believes the tax devolution to states could be higher than budgeted for FY23. The union government has projected a nominal GDP growth rate of 11.1% and gross tax buoyancy of 0.86x for FY23. The gross tax buoyancy improved to 1.4x in FY22RE from a negative 0.62x in FY21, a five-year high, due to a better-than-expected recovery in the economic activity, an uptick in the tax compliance and formalisation of the economy.
As a result, the union government increased the tax devolution to the states to ₹7.44 trillion in FY22RE from ₹6.65 trillion in FY22BE. It has budgeted a tax devolution of ₹8.16 trillion for FY23. This, Ind-Ra believes, is an underestimation and with a union tax devolution buoyancy closer to 1x (assuming 13.6% of nominal GDP growth for FY23), the tax devolution to states is likely to be higher at around ₹8.4 trillion than FY23BE. Taken together with a higher capital outlay, this would provide states with greater fiscal flexibility to boost the capital expenditure in FY23.
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