Scheme for Providing Financial Assistance to the States for Capital Expenditure

What’s in Today’s Article?

• Why in News?
• What is Capital Expenditure?
• Why is Capital Expenditure Important?
• Capex vs Revenue Expenditure and Concerns about the Rising Capex in India
• Interim Budget 2024 Announcements wrt Capex
• Conditions for Untied Capex Loans to States

Why in News?

• Introduced in FY21, the scheme for providing financial assistance to the states for capital expenditure was extended to FY25 in the Interim Budget 2024.
• Recently, the central government has introduced conditions for untied capex loans to states, such as the States must follow the branding norms for centrally sponsored schemes (CSSs) to access interest-free loans.

What is Capital Expenditure/Capex?

• Capital expenditure includes money spent by the government on the following:
  • Development of physical assets like machinery, equipment, building, health facilities, education, etc.
  • Acquiring fixed (land) and intangible assets
  • Upgrading an existing asset
  • Repairing an existing asset
  • Repayment of loan
• The Budget estimate of the government of India's capital expenditure for the year 2020-21 was Rs 1,084,748 crore.
• Capex of government has been considered to be the prime driver of capex in the economy in the last few years.
  • This is because the private sector has not been in a position to invest due to lower demand and high inflation.

Why is Capital Expenditure Important?

• Capital expenditure, which leads to the creation of assets, is long-term in nature and allows the economy to generate revenue for many years by adding or improving production facilities and boosting operational efficiency.
• Acquiring fixed assets gives profits or dividends in future, repayment of loan reduces liability.
• It also increases labour participation, takes stock of the economy and raises its capacity to produce more in future.

Capex vs Revenue Expenditure and Concerns about the Rising Capex in India

• Unlike capital expenditure, revenue expenditure (salaries of employees, interest payment on past debt, subsidies, pension, etc) is one that neither creates assets nor reduces any liability of the government.
  • It is recurring in nature.
• In the FY 2019-20, capital expenditure was 14.2% of Budget Estimates.
• The government had to cut public spending sharply towards the end of the financial year in order that the deficit target could be met.

Interim Budget 2024 Announcements wrt Capex

• The scheme for providing financial assistance to the states for capital expenditure was extended to FY25 with an outlay of Rs 1.3 trillion as against the revised estimate of Rs 1.05 trillion for FY24.
  • In the Interim Budget, the Centre cut the outlay for the capex facility by 19% to Rs 1.05 trillion from the budget estimate of Rs 1.3 trillion for FY24 as some states failed to meet conditionalities.
  • Andhra Pradesh, Kerala and Punjab did not receive any funds in FY24 from the liberal loan facility as these states -
    • Did not fulfil the conditionalities or
    • Failed to fully spend the amounts allocated to them in the previous fiscal under the scheme.
  • Of the Rs 1.3 trillion for FY25, Rs 55,000 crore in united capex loans would be rolled out from April 1, 2024.
  • The reform/project linked Rs 75,000 crore would be rolled out after the new government is formed in May-June.

Conditions for Untied Capex Loans to States

• The untied loans would be released to states in two instalments -
  • With the first instalment of 66% of the approved amount on meeting the mandatory conditions and
  • The second instalment of 34% will be released on utilisation of at least 75% of the amount released in the first instalment.
• To receive interest-free capital expenditure loans from the Centre under the “untied” category, states will have to comply with the branding norms for centrally sponsored schemes (CSSs).
• Also, they have to deposit interest accrued on the unutilised central-schemes funds lying with the state-level single nodal agencies (SNA) by March 31.
• With many states tweaking the names of CSSs, the Centre has made it mandatory that to avail the capex loan, they would have to retain the official name of all schemes.
• Further, the SNA model requires states to notify an SNA for each CSS to receive funds from both the Centre and from state budgets.

Q1) What is a centrally sponsored scheme?

Centrally Sponsored Schemes are schemes that are implemented by state governments but are largely funded by the central govt with a defined state government share. Examples of such schemes include the MGNREGA and the PM Gram Sadak Yojana.

Q2) What is a central sector scheme?

Central Sector Schemes are those that are implemented by a central agency and 100% funded by the center on subjects within the union list. For example, the National Social Assistance Programme.

Source: Centre sets conditions for even untied capex loans to states | BS