Right on cue – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/editorial/the-increased-cash-flow-from-the-centre-should-help-states-push-capex-in-the-busy-season-ahead/article37564670.ece

The increased cash flow from the Centre should help States push capex in the busy season ahead

The Centre has done well to release an additional tranche of funds due to the States from the divisible tax pool. Normally, it disburses 14 instalments of funds, in all amounting to 41 per cent of the divisible proceeds, of which three are generally given towards the very end of the fiscal year. This time, a release of two instalments amounting to ₹95,082 crore is expected to provide some liquidity comfort to the States and help them frontload their capital expenditure – which as Finance Minister Nirmala Sitharaman indicated is one of the basic objectives behind making these advance transfers. States could do with the extra cash flows as their finances have taken a hit in the wake of negative GDP growth and revenue collection in 2020-21, on the one hand, and additional emergency-based welfare and health related expenditure obligations arising out of Covid, on the other — in other words, the ‘scissors effect’ of falling revenue and rising expenditure. Even in better times, States have shown a tendency to meet their fiscal targets (of 3 per cent of GSDP), or overachieve them, by scrimping on capital expenditure, as pointed out by the Reserve Bank in its October 2020 report on State finances. It is noteworthy that States account for 60 per cent of the country’s capex. The recent outgo towards the Pay Commission award, Discom reforms and farm loan waivers has skewed expenditure further in favour of revenue items. A tendency to roll out sundry freebies during election season adds to the imbalance.

A boost to high multiplier capex at this stage will boost future revenues. By frontloading the funds released, the Centre should nudge States into meeting their share in joint infra projects. However, as the RBI report observes, the way forward for States is to boost their own revenues through digitisation, improve revenue gathering by urban local bodies and implement structural reforms to boost growth. As the report says, “Investing in health care systems and social safety nets… have to be an integral part of the fiscal strategy.” A distinction between quality welfare spending and throwaways needs to be made. The fiscal deficit ceiling of 3.5 per cent should be retained till the economy retains its pre-pandemic momentum, with health infra being included in the fiscal incentive package.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s