Increase capital spending, Centre tells states, Sitharaman to meet state FMs next week

New Delhi: According to a report in The Print, In a bid to spur public spending, the Ministry of Finance has written to the chief secretaries of all states and Union territories, asking them to increase the pace of their capital spending for the remaining part of 2021-22.

“The ministry is constantly engaging with the chief secretaries of all states so that they can be supported in their efforts to increase capital spending,” the report said.

The communication to states through this week is part of an ongoing exercise and a comprehensive review the finance ministry has been undertaking, not just with departments of the central government but also with those of the states, on capex.

Efforts to ensure that states increase capital spending also come at a time when spending by the private sector has continued to be slow. Private capital spending is crucial to revive the economy on a sustainable basis as the Centre’s capital spending is a fraction of overall investment in the economy. In 2020-21, the Centre’s capex was just 8 percent of the gross fixed capital formation.

Gross fixed capital formation is seen as a proxy for investments in the economy.

Therefore, despite an increase of 26 per cent in the Centre’s capex in 2020-21, gross fixed capital formation contracted 8.6 per cent that year, when measured in nominal terms.

FM to Meet State Ministers

According to the official quoted above, Finance Minister Nirmala Sitharaman is scheduled to meet states’ finance ministers on 30 December to discuss capital spending targets for states in 2022-23 and to discuss various bottlenecks that they face in pushing spending.

“The meeting will be a physical one with all state finance ministers in Delhi,” the report said.

Even last month, Sitharaman interacted with chief ministers and finance ministers of states, reviewing the progress on capital expenditure, and asking them to increase their spending to create more employment opportunities.

According to a memorandum from the department of expenditure, the finance ministry had fixed the states’ capex target at Rs 5.79 lakh crore for 2021-22.

Finance Secretary T.V. Somanathan had said last month that most states are on track to achieve their targets set for the current fiscal.

Concerns Over Spending

The Centre is also concerned over states’ spending because they have lowered their borrowing from the market this fiscal. So far, states have borrowed 39 per cent less this year as compared to the year-ago period on a net basis.

Every year, the Centre assigns a borrowing limit for all states that is calculated as a percentage of their GDP.

Out of the borrowing limit of 4 per cent of states’ GDP assigned this financial year, amounting to Rs 8.47 lakh crore, 0.5 per cent or Rs 1.06 crore was earmarked for incremental capital spending.

Over and above this, the Centre had also introduced a new incentive scheme for states at the beginning of 2021-22. It said that states will be eligible for incremental borrowing if they meet 15 per cent of their spending target by first quarter ending June, 45 per cent by the end of second quarter ending September, and 70 per cent by the end of the third quarter ending December, the report said.

For its own capital spending, the Centre had set a target of Rs 5.54 lakh crore to be spent in the current financial year, an increase of 34.5 per cent over last year. According to the latest data with the Controller General of Accounts, the Centre slowed on its spending in October.

While capex in October was down 24 per cent from last year at Rs 23,900 crore, it was up 28 per cent at Rs 2.5 lakh crore in the seven months to October.