Centre will fund the states Rs 95,082 crore in two instalments

In November, the Centre would contribute Rs 95,082 crore to states, including the advance release of one instalment of central tax devolution, to enable them increase capital investment and aid growth.

Two instalments of Rs 47,541 crore each will be released to states on November 22 instead of one, said Union Finance Minister Nirmala Sitharaman on Monday, following a marathon meeting with chief ministers, state finance ministers, and officials on increasing investments in infrastructure and growth, which will spur job creation.

According to the Finance Commission formula, states are entitled to 41 percent of central taxes, which are devolved in 14 instalments over the course of a fiscal year.

“States will not be short of money in their hands when all of us are pressing forward with the infrastructure expenditure to be taken up by them,” she said.

Similarly to the goods and services tax compensation agreed upon for the entire year and already provided by early November, some chief ministers requested frontloading of a portion of the tax devolution for the current fiscal year during the meeting in order to increase capital expenditure, according to the finance minister.

The first-of-its-kind meeting was held to discuss key ideas with states in order to entice additional investment into the country at a time when the economy has sharply recovered following the second Covid wave, with key indicators such as exports, manufacturing PMI, and digital payments reaching pre-pandemic levels.

“We are experiencing rapid expansion. However, it is also a moment when we are looking at measures to sustain growth and reach as near to double-digit growth as possible, for which both the Centre and the states would have to collaborate,” Sitharaman added.

The Union Budget for 2021-22 includes a capital outlay of Rs 5.54 lakh crore, a 34.5 percent increase over the previous year. Furthermore, approximately Rs 2 lakh crore has been allotted to states and autonomous entities for capital spending.

According to Finance Secretary TV Somanathan, state cash balances were high as of October 31, at Rs 2.66 lakh crore, adding that the front loading of central tax devolution will provide additional pressure to states to increase capex.

Capital expenditure in 20 states for which data is available between April and September 2021 reveals a 79 percent increase over the pandemic year FY21 and a 23 percent increase over the pre-pandemic year FY20, according to Somanathan.

In response to a question on why some opposition-ruled states aren’t lowering the value-added tax on petroleum items, Sitharaman said the Centre has already written to them. She went on to say that GST would not be enforced on the products until the GST Council voted on a tax rate.

Somanathan stated that the recent reduction in excise duty on petrol and diesel by the Centre was solely the responsibility of the central government.

“Another concern mentioned was the recent tax drop on gasoline and diesel, and states were told that the full reduction was in the non-shareable portion of the revenues.” “It is a revenue loss for the Centre, but there is no income loss for the states,” he explained.

Suggestions from the Centre

The finance minister stated that potentially monetizable assets in states that have been excluded from the National Monetization Pipeline – which only includes central government assets – can be leveraged to increase capital available for infrastructure creation and pressing priorities in other social sectors. “The Centre has offered incentives for state disinvestment,” she explained.

In addition to increasing investor attractiveness and expediting ease of doing business initiatives, the minister urged that governments implement electricity reforms.

She emphasised the importance of streamlining land acquisition procedures and establishing land banks to be tapped during investment, citing land as one of the primary obstacles for project development.

She believes that urban local governments should be reinforced because they have received a higher allocation than previously and are increasingly being pushed to pursue resource mobilization.

“Because infrastructure projects necessitate technical help in addition to financial resources, line ministries and DEA will give all possible cooperation for technical or advisory assistance to states,” Sitharaman said, according to a finance ministry release.

She said that the viability gap funding provision will aid in the financing of socially relevant but financially unviable projects, particularly in the social sector.