Central Idea:

State governments in India have navigated fiscal challenges caused by the Covid-19 pandemic, with a focus on fiscal consolidation. Despite borrowing flexibility granted by the Union government, states kept their fiscal deficits under control in 2021-22 and 2022-23. However, there has been a notable shift in spending priorities in 2023-24, with an emphasis on capital expenditure, reflecting positive economic growth prospects.

Key Highlights:

• States, accounting for over three-fifths of total government spending, traditionally focused on revenue expenditure but increased capital expenditure significantly in 2023-24.
• The ratio of capital outlay to total expenditure reached an eight-year high at 14.1%, indicating a growth-enhancing strategy.
• A 45.7% increase in capital outlay, fueled by timely disbursements from the Union government and buoyant state revenues, contributed to this shift.
• The Union government’s proactive release of tax devolution and approval of capital assistance schemes played a crucial role.
• Despite the healthy growth in state revenues, a 29.2% decline in grants from the Union government led to a reliance on market borrowings.
• Record-high gross market borrowings during the first nine months of the year were primarily directed towards capital expenditure.

Key Challenges:

• A shortfall in grants from the Union government led to tepid overall revenue growth, necessitating increased market borrowings by the states.
• Achieving the aggregate fiscal deficit target of 3.1% of GDP may be challenging due to the reliance on market borrowings and a potential slippage.

Key Terms and Phrases:

• Fiscal Deficit: The difference between government expenditure and revenue.
• Capital Expenditure: Money spent on creating or acquiring assets with long-term benefits.
• Revenue Expenditure: Regular spending on operational costs like salaries, pensions, and subsidies.
• Tax Devolution: Allocation of tax revenues from the Union government to states.
• Market Borrowings: Funds raised by states through the issuance of bonds in the financial market.

Key Quotes and Statements:

• “States’ capital expenditure is being fueled by an interplay of two forces…”
• “The quality of their expenditure — ratio of capital outlay to total expenditure — stands at 14.1%, an eight-year high…”
• “The Union government has been proactive in releasing the advance instalments of tax devolution…”
• “Despite this healthy growth in states own revenues, their overall revenue receipts have grown at an average pace of 5.5%…”

Key Examples and References:

• The advance release of monthly tax devolution and timely disbursements of funds for the special scheme on capital assistance.
• Approval of capital expenditure worth and released under the special assistance scheme till November 2023.
• Record-high gross market borrowings during the first nine months of the year.

Key Facts and Data:

• Aggregate fiscal deficit target for states: 3.1% of GDP.
• Ratio of capital outlay to total expenditure: 14.1%, an eight-year high.
• Gross market borrowings by states during the first nine months of the year.

Critical Analysis:

• The shift towards capital expenditure indicates a positive economic outlook and potential for growth.
• The reliance on market borrowings due to a decline in grants poses a fiscal challenge.
• Achieving the fiscal deficit target might be challenging, with a potential slippage.

Way Forward:

• States should continue prioritizing capital expenditure for sustained economic growth.
• Improving efficiency in tax administration and formalizing the economy can enhance revenue.
• Collaboration between Union and state governments for stable fiscal management is crucial.

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