26 November, 2019
Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
News: The last remaining engine of India’s capital expenditure cycle, state government capex, is losing steam and could slow down further as state finances come under increasing strain, posing a risk to a capex revival in the country.
Prelims and Mains focus: about capital expenditure; the recent economic slowdown and its impact on various sectors of Indian economy
Over the past two decades, state governments have led public investments in India. As private investments dried up in the past few years, the role of state governments became even more central to sustain investments in the country.
However, with state finances under stress, state capex plans have been trimmed, further dampening a subdued capex cycle in the country. Rising expenditure on the revenue account, including populist spending on farm loan waivers, has crimped the ability of state governments to drive the capex cycle. The past couple of quarters saw a sharp drop in new project announcements, data from the project tracking database of the Centre for Monitoring Indian Economy (CMIE) shows .
The value of new state government projects saw a 75% decline from the year-ago period in the June-ended quarter of 2019, settling at the lowest in 15 years.
If the 15th Finance Commission decides to give in to the exorbitant demands of the central government, state finances would be hit badly and their capex plans will likely be trimmed further.
Why is state govt led capex expenditure crucial?
Reasons for downfall in investments:
With state finances being hit because of UDAY-related as well as other commitments, room for capex funding is likely to remain low. With the last remaining capex driver in the country being hit, a sustained revival in India’s investment cycle is likely to be further delayed.
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