The 30 November Note: Capex, Subsidy Arrears and an Off-Budget Proposal
It is 30 November. A state's mid-year finance review shows the fiscal deficit at 2.9% of GSDP against a full-year target of 3.0%, but only because capital expenditure stands at 38% of budget: ₹9,400 crore spent of ₹24,700 crore. Revenue receipts are 6.2% below projection, mainly on stamp duty and state GST. Power subsidy arrears of ₹3,100 crore remain unpaid to distribution companies. A ₹2,200 crore externally aided water project is stalled on land acquisition. The state can still draw a 50-year interest-free central capital expenditure loan of ₹1,500 crore, but it must be spent by 31 March. The finance secretary proposes three measures: (a) defer ₹1,200 crore of irrigation works to the next financial year; (b) route ₹900 crore of the water project through a state public sector undertaking so the borrowing sits outside the budget; (c) use the central loan for road resurfacing works that can be executed in four months. The chief secretary wants a decision note.
1. Assess proposal (b): routing the water project through a state PSU.
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Proposal (b) should be rejected in the form proposed. Borrowing through a wholly owned state PSU for a project the state would otherwise fund does not reduce the state's fiscal risk; it relocates it. The state owns the entity, guarantees or effectively stands behind its debt, and will service the loan through grants or subsidies. The explicit liability disappears from the deficit line and reappears as a contingent liability, which is the worse place for it because it is unwatched, unaudited at the right level, and invisible to the legislature when it votes on the budget.
There are three further objections. Cost: PSU borrowing typically prices above sovereign or state borrowing. Transparency: the Comptroller and Auditor General's audit and the finance accounts will not show a clean picture. Classification: for fiscal rule purposes and for the Finance Commission's debt path, borrowing that is in substance the state's own is increasingly treated as such, so the state may be found to have breached its target without the benefit of having openly explained a deviation.
If the project is viable, the correct route is to borrow on budget and say so, or to re-phase it. Disguise is not restructuring.
2. Between deferring ₹1,200 crore of irrigation works and clearing ₹3,100 crore of subsidy arrears, which should the state prioritise and why?
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The framing as a binary is itself the error, but if forced to choose, the state should protect the capex and treat a large part of the subsidy arrear as non-deferrable committed spending, then find the balance elsewhere.
Deferring irrigation works looks attractive because it is easy: unspent capital budget is the line item that a finance department can compress without issuing an order to anyone. But capital expenditure has the highest multiplier in the economy - empirical work in India, including NIPFP estimates, puts it near 2.5, well above general revenue spending - because it creates assets, generates contract income and supports demand over several years. Deferring it slows the state's own growth in the year the shortfall occurs, worsens next year's problem, and escalates project costs through price revision.
Subsidy arrears are revenue expenditure, but the arrears already belong to the distribution companies and their non-payment pushes losses onto the power sector, raising the state's future subsidy bill. They are hidden borrowing.
The real choice is between committed and discretionary expenditure: protect committed obligations and complete tendered projects, and absorb the shortfall through non-plan discretionary spending and better revenue collection.
3. Should the state take the ₹1,500 crore 50-year interest-free central capex loan, and if so, on what conditions?
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Take it, but only against a prepared project list, because the binding constraint is not money but absorption capacity.
A 50-year interest-free loan is close to free money in present-value terms: the state repays principal in nominal rupees five decades from now, so the real cost is negative at any plausible inflation rate. Refusing it on fiscal-consolidation grounds would be a category error, since it does not add to the deficit in any meaningful way.
The risk is timing. A 31 March deadline on ₹1,500 crore invites the classic year-end spending spike, and year-end spending in Indian public works is associated with weaker quality, padded bills and incomplete assets. Conditions should therefore be: land already acquired and no pending statutory clearance; tender already issued or a framework rate available; a maintenance and operating liability identified and budgeted, since an asset handed over without an O&M line becomes a liability within three years; and monthly physical progress measured against milestones, not against cheques issued.
Road resurfacing can be executed quickly but creates little durable value. If land acquisition for the water project can be closed within weeks, the loan is better used there, or on the irrigation packages already tendered.