Farm loan waivers to slowdown state capex

Virendra Singh Rawat
Lucknow / Jan 1, 2019
The spate of farm loan waivers in many states is projected to adversely impact the combined state government capex.


State capex is a major driver of investment growth in the Indian economy, and historically, has been higher than capex undertaken by the Centre, according to India Ratings and Research (Ind-Ra). A significant portion of the additional revenue awarded to the states by the 14th Finance Commission was spent on capex. As a result, the combined capex of state governments increased to 3.1% of GDP in FY16 from 2.4% in FY15.


During the same period, the central government’s capex increased to 1.8% of GDP from 1.6%. In subsequent years, the combined state government capex has kept at 3% of GDP or higher. However, during the periods of fiscal adjustment, like the one caused by farm loan waivers, capex becomes a soft target for deficit control. This has been witnessed in the case of Maharashtra, Rajasthan and Karnataka.


Despite revenue receipt surpassing the budgeted amount, these states could not keep the revenue deficit at the budgeted level, as the farm loan waivers led to a rise in revenue expenditure.


Rajasthan and Karnataka reduced their capex by 12% and 2.5%, respectively to offset the increased revenue expenditure, but these states still failed to keep fiscal deficit at the budgeted level. Ind-Ra noted that policy makers as well as companies should focus more on the state government budgets than the Centre’s.

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