India Ratings and Research (Ind-Ra) in its latest report has warned that a loan waiver for farmers announced by various states, including Madhya Pradesh, Rajasthan and Chhattisgarh, will have an adverse impact on the combined state government spending on capital assets. It noted that States’ capital spending is a major driver of investment growth which drives the economy, and historically, it has been higher than capex undertaken by the Centre. It also indicated that states’ capex is budgeted to be higher by 37.5 percent for the financial year 2018-19. It was 36.6 percent higher as per FY18 revised estimates.
According to the report, during periods of fiscal adjustment, capex becomes the soft target for deficit control and this has been witnessed in Maharashtra, Rajasthan and Karnataka, when they announced farm loan waivers outside budget in FY18. It noted that despite mobilising revenue receipts higher than budgeted, these states could not keep revenue deficit at the budgeted level due to increased revenue expenditure caused by the farm loan waivers. It also stated that Rajasthan and Karnataka lowered their capex by 12 percent and 2.5 percent respectively to offset the increased revenue expenditure but still failed to keep fiscal deficit at the budgeted level. Although fiscal deficit of Maharashtra was lower than budgeted due to lower than budgeted capex.
Ind-Ra further highlighted that since FY01, the share of the aggregate capex of the states in the total capital expenditure done by the Centre and the states together has been in excess of 50 percent, but it fluctuated in the range of 51-65 percent till FY16 and at 67.2 percent in FY17. It noted that in fact, the share of the aggregate capex of the states has been rising since FY14, supported by the additional fund inflows due to the 14th Finance Commission award and the taking over of discom debt by several states during FY16 and FY17.