The spirit of cooperative federalism

Since 2014, the Centre’s infrastructure investment, driven by capex push, includes the Special Assistance scheme offering reform-linked loans.

The paradigm shift in the government’s focus towards increasing allocation to capital expenditure has been the cornerstone of India’s economic strategy since 2014. The emphasis on capex reflects a long-term vision of directing investments into productive assets, creating basic infrastructure, addressing logistics bottlenecks, and enhancing regional connectivity. In addition to the multiplier effects that capex has on the economy, it also acts as a catalyst to crowd in private investment, leading to a significantly higher increase in investment in the economy, with benefits accruing over a few years. However, to achieve the maximum benefit from the capex spree of the government, it is important that the benefits move beyond just attracting private investments. Creating jobs, resulting in the irreversible economic empowerment of previously underserved regions and communities is crucial as trade and community ties improve. This is only possible when the capex spree is in sync with the states’ expenditure, reflecting the true spirit of cooperative federalism.

To sustain the momentum of capital investments in the aftermath of the pandemic, the central government took a host of steps to bolster the hands of the states in enhancing their capital investments while maintaining fiscal prudence. But, amongst all initiatives, one of the most sought-after schemes for states was the Scheme for ‘Special Assistance to States for Capital Expenditure’, which came in October 2020. The 50-years interest-free loan proposed under the scheme had multiple parts, with a significant part of the allocation being awarded to states proportionate to their share of central taxes, per the award of the 15th Finance Commission, and other parts linked to either reforms or sector specific areas. This scheme not only helped the states to make significant capital investments into areas that had long-term structural benefits, but also gave them an opportunity to dovetail the state’s capex priorities to the specific components of the scheme and avail benefits.

In 2020-21, the incentives under the scheme were linked to citizen-centric reforms in three out of four areas—implementation of the one-nation-one-ration card system; implementation of district level and licensing reforms for ease of doing business; reforms for strengthening local bodies; and power sector reforms. Subsequently, in 2021-22, the incentives under the scheme were linked to privatisation/disinvestments of the state public sector enterprises (SPSEs) and monetisation/recycling of assets. In 2022-23, the incentives under the scheme were linked to seven reform-centric areas—PM Gati Shakti-related expenditure; supplemental funding for priority segment of PMGSY, including states’ share; incentive for digitisation, capital projects on optical fiber cable; urban reforms; disinvestment of SPSEs and asset monetisation; and scrapping of old vehicles. In 2023-24, incentives under the scheme were linked to reform-centric and sector-specific areas—scrapping old vehicles, urban planning reforms, financing reforms in urban local bodies to make them creditworthy for municipal bonds, housing for police personnel above or as part of police stations, unity malls, children and adolescent’ library and digital infrastructure.

Over the years, the incentives under this scheme have categorically targeted the areas that needed significant focus from state governments but were neglected due to legacy issues. The focus of the centre was also to get significant support from the state and dovetail priority areas set by the Centre in the states’ scheme of things.

Assam as a state is perhaps one of the very few states that has applied and got approval for proposals under all the seven parts of the scheme in the ongoing financial year. Till December 2023, the state government has received `4,530 crore of the sanctioned Rs 6,174 crore. The state has immensely benefitted from this scheme, which has helped increase its capex at an aggressive rate in the past few years. Assam has taken capex to a new historical level and is likely to cross the `20,000 crore figure in 2024-25, compared to Rs 16,000 crore in 2022-23. The state has successfully dovetailed all schemes and programs, including Special Assistance to States for Capital Investment to enhance its pace of capex in all segments, primarily connectivity, tourism, education, etc.

The benefits of the scheme go far beyond monetary support for the states. Through the scheme, the states have realised the multiplier effects that capex can bring to their economies. Moreover, for states like Assam, these schemes play an important role to further enhance infrastructural connectivity.

The active thrust towards capex by states also has resulted in an improved ratio of capex to revenue expenditure of the country, which now stands at 0.29% (for April-August 2023), a massive improvement from 0.13% in the corresponding period in 2019. States’ capex was up more than 47% in the six months between April-September 2023 compared to April-September 2022. This scheme, which was initiated at the time of pandemic as crisis relief, has served many purposes since then. Most importantly, it is the scheme that has played a major role in improving the quality of public expenditure in states.

Rouhin Deb, Chief Economist, Chief Minister’s Secretariat, Government of Assam penned this piece for Financial Express.

Views are personal and do not represent the stand of this publication.