States are in a much better position to push capital expenditure quickly, and execute smaller ticket projects dispersed across the country, said Finance Secretary T.V. Somanathan, Trend reports citing The Indian Express.
“The Centre operates on certain big axis projects like national highways, railways, pipelines, telecom, that has its own value, but this (state-level capex) has a greater geographical spread and a greater diversity of projects. So, it has a good chance of being effective. So, we thought that in this push, some portion must be done through states,” Somanathan told The Indian Express.
In fact, the Union Finance Ministry consciously reached out to states as part of a nuanced strategy in the run-up to Budget 2022-23. In the meeting with states ahead of the Budget, the states’ reaction was quite positive. “They said give it to us and we will use it,” Somanathan said. Besides translating into quicker action on the ground, state projects benefit the small and medium enterprises more.
The Union government is expecting the thrust on public investment through states to have a greater multiplier effect given that they might spend less on health and more on capex in the coming year. The Finance Secretary said a policy choice must be made between little less of expenditure or more of fiscal consolidation or a little less of consolidation and more of expenditure. But either way, he said, private investments are not yet at a stage where interest rate sensitivities would be a key deterrent.
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“If we reduce the expenditure and fiscal deficit, perhaps it will get a lower cost of borrowing. Is that going to drive a sufficient quantity of investment? Is the crowding out such that by reducing borrowing, more private funds will be available and they will invest? We were not convinced that would happen in the current scenario. Yes, there will be a marginal increase in the borrowing cost, that will filter through to the private sector also. But those projects in the private sector that are being planned, I don’t think they are so interest rate sensitive that 0.25 per cent change will make them drop the project. If they were so rate sensitive, in the last two years when the rates were so low, we should have seen a surge in private investments. It was not there,” Somanathan said.
Spending, according to the Finance Secretary, will create a better growth impact, even with some borrowing impact. “At the margin, we have to consolidate. There’s no question of remaining at 6.9 per cent. But there is a pace of consolidation… We felt that spending will create a better growth impact, even with some borrowing impact. I don’t think we are in a crowding out situation because private investment intentions are not so buoyant that they are waiting to use these funds. They are not struggling to get funds; banks are also sitting on a lot of money that they can still lend. So, crowding out is less of a risk now was the judgement. And growth will be better off with a slightly higher deficit,” he said.