GENESIS OF THE NEW THOUGHT FOR A NEW INDIA
- Mahatma Gandhiji famously said, "The best politics is right action.”
- Truly so. If the electorate picked men, the most highly educated of the nation who cannot, scorning personal ease and selfish objects, make a resolute struggle to secure greater freedom for themselves and their country, a more impartial administration, a larger share in the management of their own affairs…hopes of progress are at an end, and such electorate truly neither desires nor deserves any better government.
- Leadership hence has to lay down a vision of how they shall lead the country towards the future glory as the electorate might not have the visionary abilities. Hence a Country Specific, State Specific, Sector Specific, Growth Specific, Progress Specific, Community Specific vision has to be built which should become our party manifesto and we should live and execute it day and night.
- Looking back in time in US history, what was the most important document published in 1776? Most Americans would probably say "The Declaration of Independence." However, many would argue that Adam Smith's "The Wealth of Nations" had a bigger and more global impact. The central thesis of Smith's "The Wealth of Nations" is that our INDIVIDUAL NEED and ASPIRATION to fulfill self-interest results in societal benefit. He called the force behind this fulfillment the invisible hand. Self-interest and the division of labor in an economy result in mutual interdependencies that promote stability and prosperity through the market mechanism. He believed that a government's functions should be to enable Best Market Mechanism, Protect National Borders, Enforce Civil Law, Engage in Public Works & Create Capital Assets relevant to the times have to be created as more wealth is needed to fulfill the growing aspirations of the citizens. Without creation of CAPITAL ASSETS with CASH FLOW CAPABILITY doubling GDP shall remain a dream.
India's GDP grows by 7.2% in FY23 . FY24 May See a Marginal Rise in the Share of States’ CAPEX in GDP
- The percentage of states’ combined capital expenditure in the Gross Domestic Product (GDP) will experience a slight increase from 2.5% in FY23 to 2.8% in FY24.
- The 15th Finance Commission suggested that states could have a fiscal deficit of 4% of Gross State Domestic Product (GSDP) in FY23, with 0.5% of it being linked to power sector reforms. Despite this, an evaluation of provisional data for 26 states by the Comptroller and Auditor General revealed that during April-January FY23, these states together managed to accomplish 52% of the budgeted capital expenditure for FY23, leaving limited fiscal space for additional CAPEX.
- According to CAG data, during April-January FY23, only a few states including Kerala, Karnataka, Gujarat, Himachal Pradesh, Madhya Pradesh, Bihar, and Odisha have spent 60% to 74% of their FY23 budgeted estimate (BE) on capital expenditures.
- The states have borrowed substantially less than the budgeted gross market borrowings of approximately Rs. 9 trillion for FY23, which suggests that they have not taken full advantage of the additional fiscal space available for capital expenditure.
- The inclusion of off-budget borrowings by state government entities in FY22 and FY23 as part of the states’ net borrowing ceiling for FY23 by the central government could have reduced the market borrowings of states. It is forecasted that the gross market borrowings of states will be Rs. 8 trillion in FY24, with net market borrowings projected to be Rs. 5.1 trillion.
States have a large role in ensuring capital formation
- However, observers and policymakers have become increasingly aware of the importance of the role of states. The combined spending of Indian states on capital expenditure now exceeds that of the central government. For example, in 2021–22, this figure combined for states and Union territories, according to budget estimates, was 10.5 trillion. The Centre’s effective capital expenditure that year was 8.4 trillion, including ₹2.5 trillion as grant for creation of assets. That the theme of this year’s Reserve Bank of India’s (RBI) report on state finances is ‘Capital Formation in India: The Role of States’ is an eloquent acknowledgement of the power of states in this context.
- However, this ‘power’ is neither uniform nor necessarily related to the economic size of a particular state. Thus, Uttar Pradesh, whose gross state domestic product (GSDP) was estimated to be ₹20.5 trillion in 2022–23, budgeted for capital expenditure of ₹1.24 trillion, while Maharashtra and Tamil Nadu with far higher GSDP figures of ₹35 trillion and ₹24.8 trillion budgeted for capital spending of ₹65,000 crore and ₹43,000 crore, respectively.
- Therefore, one general macro-economic challenge is to address this uneven inclination of states or capacity for capital expenditure, which adds uncertainty to the impact of an expansionary fiscal policy led by capex, thus weakening its potential benefits.
- But it is not just the short-term effect of demand creation that should concern our policymakers. The ultimate aim of all capital expenditure is to enhance the productive capacity of the economy. This is why the nature of state capital expenditure drawn in is also vitally important. Ideally, the nature of state capital expenditure drawn in by central capital expenditure should be such that it dovetails with the latter to optimize long-term enhancements of economic capacity.
- A ‘virtuous alignment’ may result in infrastructure spending by the central government ‘crowding in’ state capital expenditure to the ultimate benefit of the state and in line with local needs. Thus, UP may hike its road building programme to amplify the impact of the efforts of the National Highway Authority of India; Maharashtra and TN, given their edge in connectivity over UP, may opt for a different strategy; their optimal strategy may perhaps lie in enhancing allocations to urban bodies which then would piggyback on central spending to create urban economic powerhouses with high social indices like SDG. The NITI AAYOG has a SDG measurement but the states need to act on the gaps which they cannot without adequate funds.
- The Union budget for 2023–24 imparted a gentle nudge in this direction.
- By linking part of its outlay for states’ 50-year loans to state-level reforms in urban local bodies that would make them creditworthy (for municipal bond issuance), the budget has presented us a good template of how expenditures in one budget can be aligned with state expenditures as per local needs.
- While budgeted capital expenditure is an important determinant, what really matters is the amount actually spent. An analysis of the expenditure pattern of the past few years shows that states are unable to spend the full budgeted amount, despite having sufficient resources. In the backdrop of perpetual uncertainty over revenues, states have a tendency to postpone capital expenditure till revenue streams firm up. This year too, after a slow start in the first part of the financial year, capital expenditure by states has picked up only recently as revenue uncertainty was reduced, which led to a bunching up of expenditures in the last quarter.
- The RBI report, while acknowledging that Indian states made higher capital outlays in 2022–23, notes that states would do well to “mainstream capital planning rather than treating them as residuals and first stops for cutbacks in order to meet budgetary targets.”
- Finally, the quality and speed of expenditure also deserves equal attention. For that, states would need to step up their execution capacity and establish an enabling regulatory environment. Land availability, clearances, logistics and communication, project management, stakeholder engagement and local capacities are all critical determinants. The planning and budgeting cycle of states also has to be aligned with the fund releases so as to fully utilize the resources within the time available.
- Given the fact that states now spend more on capital expenditure than the Centre, their role has acquired greater significance than ever before. States need to not just budget more, but also spend fully the budgeted capital amounts uniformly over the year.
- A virtuous alignment of central and state budget priorities will not just ‘draw in’ state expenditure (thus amplifying the aggregate demand effect of the exercise), but result in unleashing productive capacity which could come to create a whole that is greater than the sum of its parts.
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