Mumbai: Farm-loan waivers announced by a number of states could adversely impact the combined state government spending on capital assets, India Ratings said in a study after agricultural distress appeared to have emerged as a major election issue in the latest round of balloting.
Mumbai: Farm-loan waivers announced by a number of states could adversely impact the combined state government spending on capital assets, India Ratings said in a study after agricultural distress appeared to have emerged as a major election issue in the latest round of balloting.
Contrary to popular perception, state government spending on capacity expansion is a major driver of investment growth in the economy and has been higher than the capacity expansion undertaken by the Centre, India Ratings said.
During periods of fiscal adjustment, capex becomes the soft target for deficit control. This has been witnessed in Maharashtra, Rajasthan and Karnataka, when they announced farm debt waiver outside budget in FY18.
Despite mobilising higher revenue than budgeted, these states could not maintain the revenue deficit at the budgeted level due to increased revenue expenditure caused by the farm-loan waivers, India Ratings said.
Rajasthan and Karnataka reduced their spending on capacity expansion by 12.0% and 2.5%, respectively, to offset the increased revenue expenditure but still failed to keep fiscal deficit at the budgeted level. Although fiscal deficit/GSDP of Maharashtra was lower than budgeted, even then capex saw contraction, the ratings firm noted.
The role played by state governments is more crucial than generally perceived from the perspective of both capex and endowment of human resources, which are crucial for achieving sustainable growth. Therefore, India Ratings believes policy makers and companies should focus more on state government budgets.
The capex spend in the budget is divided between developmental and non-developmental items. With the exception of FY08, the share of states’ developmental capex in the total capex of the Centre and states was higher than 70% during FY01-FY17(BE). It peaked at 81.6% in FY09 and stood at an average of 75.7% during FY01-FY17(BE).
Some of the expenditure heads wherein the share of state capex was above 90% during FY01-FY17(BE) are family welfare, public health, education and art, agriculture, power and irrigation. Most of the heads fall under the jurisdiction of states.