The Centre seems to have rediscovered the fiscal prudence of state governments by dramatically raising its 50-year interest-free loans to them under the “Scheme for Special Assistance to States for Capital Expenditure”. Finance Minister Nirmala Sitharaman said the scheme was being extended for another year with “a significantly enhanced outlay of ₹1.3 lakh crore” – up from ₹1 lakh crore allocated in the Budget 2022.

The jump is dramatic, given that the revised estimate for FY23 brought the budgeted allocation of ₹1 lakh crore down to ₹76,000 crore – which jumps 71% to ₹1.3 lakh crore. It is even more so given that the actual disbursements under the scheme for FY21 and FY22 were ₹11,830 crore and ₹14,186 crore, respectively (Economic Survey 2022-23). The higher allocation to states for capex goes hand-in-hand with the Centre’s claim of raising its own capex by 33% in FY24 (BE) over FY23 (BE). But budget documents show, the Centre’s “total” capex, that of the Centre and its public sector enterprises, for FY24 (BE) is 4.9% of the GDP – the same as the total “actual” capex in FY20.

What is even more impressive is that such faith in states’ fiscal abilities comes after several months of severe criticism of their fiscal performance. It began with the RBI’s “State Finances: A Risk Analysis” report of June 2022, which accused states of giving “non-merit freebies” and “off-budget” borrowing to cause “rising subsidy burdens” and debts going up to “4.5% of the GDP”, even while their “own tax revenue” was on a “slowdown”. Both the RBI and Centre pulled up banks for lending money to states with the RBI even asking the SBI and others to stop lending against future revenues – a normal banking practice. A national debate raged over states’ fiscal profligacy, arising out of “freebies” and “revdi culture” into which the Supreme Court and the Election Commission were sucked in.

What changed in 2023?

From fiscal profligacy to fiscal prudence

The RBI corrected its assessment of states’ fiscal performance in its January 2023 report, “State Finances: A Study of Budgets of 2022-23. This report lavished praise and reversed earlier charges. It commended states for “recognition of off-budget borrowings”; borrowing “within” the ceilings; “improved” fiscal health from “a sharp pandemic-induced deterioration in 2020-21”; “secured” financial positions “in terms lower deficit indicators (viz., gross fiscal deficit/ revenue deficit/primary deficit as a per cent of GDP)”; “increased” fiscal headroom (savings) for undertaking higher capex etc. At the same time, it advised states not to adopt the old pension scheme (OPS), unlike a strong warning against this in June 2022 report, by stating that this would eat into their “annual saving in fiscal resources”.

Here are a few more revelations from the January 2023 report:

· States “have budgeted higher capital outlay” in FY23 (BE) than in FY20, FY21 and FY22.

· 19 of 31 states/UTs are revenue surplus in FY23 (BE) – up from 13 in FY22 (RE) and 7 in FY21.

· States’ gross fiscal deficit (GFD) is budgeted to decline from 4.1% of the GDP in FY21 (first pandemic fiscal) to 3.4% in FY23 (BE).

· States’ debt is budgeted to ease to 29.5% of the GDP in FY23 (BE), as against 31.1% in FY21 (pandemic fiscal), which is “still higher” than 20% recommended by FRBM Review Committee in 2018, warranting “prioritisation of debt consolidation”.

Evidently, the RBI’s June 2022 report was a rush job. It relied more on data of the pandemic fiscals (FY21 and FY22). In contrast, its January 2023 report looked more closely at the budget documents of FY23 (BE). By then, Finance Ministry think tank National Institute of Public Finance and Policy (NIPFP) had already examined the budget documents of states to produce a comprehensive study of 18 major states in August 2022 and presented a contrasting picture.

The NIPFP report showed only one state, Punjab, overshot the 15th Finance Commission’s limits on debts in FY23 (BE) – as against ten states the RBI had named in June 2022, five of which had been called “highly stressed” (Bihar, Kerala, Punjab, Rajasthan, and West Bengal). The NIPFP also found that out of 18 major states, eight were revenue surplus and five had fiscal deficits of 3% or less (of their GSDPs).

The Economic Survey of 2022-23, released on January 31, 2023, echoed the assessments of the NIPFP and the revised RBI report. Besides, it said states’ capital outlay was 31.7% more than what was budgeted for FY22 and commended the states’ capex performance.

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