Most States failed to rein in revenue expenses for FY 2022

Context

According to a Business-Line analysis of capital and revenue expenditure trend of 23 State governments based on data available from CAG showed that, “most States have recorded an increase in their capital expenditure in the first quarter of 2021-22 as compared to the pre-pandemic levels in Q1 FY20.” What is Capital and Revenue Expenditure?

• Capital expenditures (CAPEX): are funds used by a company to acquire, upgrade, and maintain physical assets such as equipment.
• Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue generation over a longer period.
• Revenue expenditures are short-term expenses used in the current period or typically within one year. Revenue expenditures include the expenses required to meet the ongoing operational costs of running a business, and thus are essentially the same as operating expenses (OPEX).
  • Revenue expenditures also include the ordinary repair and maintenance costs that are necessary to keep an asset in working order without substantially improving or extending the useful life of the asset.

Findings of the Analysis:

• Few of the larger States such as Maharashtra, Tamil Nadu and Gujarat have shown a decline in capex.
• Most States have also struggled to control revenue expenditure this fiscal.
• The combined capex spending of these 23 States was 15 per cent higher than the capex outlay in the first quarter of FY20 and nearly 62 per cent more than capital expenditure in the pandemic-hit first quarter of
• Among the States, Uttar Pradesh topped the list in capex spending with an outlay of? 9,734 crore in
• It was followed by Madhya Pradesh (?8,761 crore), Haryana (?5,495 crore) and Andhra Pradesh (?4,606 crore).

Significance of the Finding:

• Capital expenditure (Capex) has a high multiplier effect with an ability to crowd-in private investments which in turn enhances the production capacity leading to higher economic growth and employment generation.
• Thus the Centre has been constantly nudging States to boost their capital spending, especially to regain growth in the aftermath of the global pandemic.

Government role to boost ‘Capex’:

• In April 2021, the Centre announced to provide an additional amount of up to? 15,000 crore to States as interest free 50-year loan for spending on capital projects including? 5,000 crore if States undertake asset monetisation and disinvestment of their public sector enterprises.
• The scheme was in continuation to last year’s 50-year? 12,000-crore interest-free capex loan provided to States to be spent on new or on-going capital projects under the ‘Atma Nirbhar Bharat package’.
• As an incentive, the Centre allowed some States to borrow an additional amount of? 15,721 crore (or 0.25 percent of their Gross State Domestic Product (GSDP) in the open market.

Capex spending & Economic sectors:

• Both revenue and capital expenditures of States are classified under general, social and economic sectors.
• Most of the State’s capex spending went into the social sector which includes spending on building healthcare infrastructure and education.
• Many States have ramped up hospitals and emergency facilities to manage the Covid crisis.
• For instance, Uttar Pradesh’s capex spending on Social Sector jumped more than ten times to? 2,439 crore in Q1FY22.
• The economic sector expenses cover infrastructure spending on roads, railways, ports and other growth-fuelling economic activities while the general sector captures all other expenses.