The Congress Government in Rajasthan has thrown their ace of spades- farm loan waiver, to get back in power. They have waived off loans in a haste. Then farm loan waivers announced by various states, including Madhya Pradesh and Chhattisgarh, will adversely impact the combined capital spending of the states, a report warned.

For the current fiscal, states’ Capital Expenditure is budgeted to be higher by 37.5 per cent. It was 36.6 per cent higher as per Financial Year-18 revised estimates. 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 said.

As a result, Rajasthan and Karnataka lowered their Capital Expenditure by 12 per cent and 2.5 per cent, respectively, to offset the increased revenue expenditure but still failed to keep the fiscal deficit at the budgeted level.

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The gradual increase in the gap

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.

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 per cent. It, however, fluctuated in the range of 51-65 per cent till FY16 and at 67.2 per cent in FY17, notes the report.

In fact, the share of states’ aggregate CapEx has been rising since FY14, aided 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.

According to the financial experts, policy-makers, as well as companies, should focus more on the states’ budgets than the Centre’s.’ It can be noted that the new Congress governments in these states quickly announced farm loan waivers as that was one of the key campaign promises.

More such sops are likely from AP, Haryana and Odisha, which have a fair share of agri-credit and are poll-bound along with the national elections. If these states individually announce debt relief, the combined waiver would be at least around Rs 600-700 billion, say analysts.