Centre to front-load devolution to states this month, says Finance Minister

Finance Minister Nirmala Sitaraman.

Finance Minister Nirmala Sitharaman said on November 15 that the centre will release additional devolution funds due to states on November 22 to enable them to spend on capital expenditure, as the centre and states look to boost economic activity.

"Many states suggested that it would be helpful for them to get a part of the tax devolution frontloaded. This being an exceptional year, states will not be short of money when all of us are pushing for infrastructure," Sitharaman said after a day-long interaction with chief ministers and administrators of states on economic and infrastructure-related issues.

"Hence I have asked the Finance Secretary to release an extra installment this month. On November 22, two devolution installments of Rs 47,541 crore will be released to states. That totals to Rs 95,082 crore," she said.

The finance minister said that chief ministers from 15 states attended the interactions, and the finance ministers and other ministers represented the remaining states.

As per the recommendations of the 15th Finance Commission, 41 percent of the divisible tax pool is to be devolved to states. Finance Secretary TV Somanathan said that the funds are given to states in 14 installments, 11 in eleven months and three in March, the last month of the fiscal year.

"This month we will give the states two installments instead of one," said Somanathan. He also said capital expenditure of 20 states this year, for whom data was available, was 79 percent than pandemic-hit 2020-21 and 23 percent higher than 2019-20.

Sitharaman said that there were key ideas from states like the way in which project approvals are given should be streamlined, and the need for better forums of dispute mechanism. There were also suggestions on trade policies for the North East and the need for off-shore wind energy generation.

Some states did ask for relaxation of the Fiscal Responsibility and Budget Management (FRBM) targets, she said, adding that the states had been requested to send their suggestions in writing as well.

"Today's meeting was to understand the states' perspective. They appreciate that spending on infrastructure is important. It was to understand their requirements on infrastructure spending, and what they expect to do in the coming months," she said.

The meeting came in the backdrop of the Narendra Modi government making big ticket infrastructure and increased public investment its silver bullet to enable economic recovery post-Covid. The centre’s capital expenditure target for the current fiscal year is Rs 5.54 lakh crore, some 41 percent of which has been spent in the April-September 2021 period.

With the Rs 110 lakh crore National Infrastructure Pipeline and the Rs 6 lakh crore National Monetization Pipeline, the centre hopes that a roadmap has been laid for massive new infrastructure projects as well as monetizing of brownfield projects owned by PSUs and various government agencies.

However, none of this can be achieved without equal participation by states, especially when it comes to land allocation, providing amenities like power, or giving environmental, industrial and various other clearances. Hence the meeting today.

States have been given incentives to spend more on the capex front and also provide a conducive environment for private investment to come in. The incentives include allowing states additional borrowing room if they meet pre-determined capex targets each quarter.

Out of the net borrowing ceiling (NBC) of 4 percent of GSDP for states in 2021-22, borrowings upto 0.50 percent of GSDP were earmarked for incremental capex, the individual targets for which was fixed by the Finance Ministry.

To become eligible for incremental borrowing, states were required to achieve at least 15 percent by the end of June quarter, 45 percent by the end of September quarter, 70 percent by the end of Q3 and 100 percent by 31st March 2022.

After two rounds of review of capital expenditure, total additional borrowing permission of Rs 32,412 crore has been issued to states. After the July-September quarter, Chhattisgarh, Kerala, Madhya Pradesh, Meghalaya, Punjab, Rajasthan and Telangana were given permission to borrow an additional Rs 16, 691 crore.

There would be a final review of actual capex by states in June 2022. Any shortfall in capex for 2021-22 by any state will be adjusted from the borrowing ceiling of the State for the year 2022-23.