the state-directed capital spending push in the 2022-2023 budget is viewed with trepidation by some opposition-led states that they might end up mortgaging their fiscal independence and sovereignty to the Center for an extended period.

States report specific concerns how the 50-year loans, specifically earmarked for capital expenditures in the next fiscal year’s budget, will “lock them in” in accordance with the constitutional obligation under section 293(3), under which they must request authorization from the Center for any future borrowing.

“…They took two accounting tricks, what I called extremely creative accounting. Due to Article 293(3), the previous AIADMK government, which was a coalition partner of the BJP, never wanted to take it (the loan from the Center), because at the time it was very clear that it was just bait as the amounts were insignificant, around Rs 500 crore for Tamil Nadu…even the previous regime saw the fear that they would use this to trigger Section 293(3) as it is not refundable in advance. It locks you in for 50 years,” said Tamil Nadu Finance Minister Palanivel Thiaga Rajan.

TS Singh Deo, Minister of Health of Chhattisgarh and representative on the GST Board, said investment loans weigh on the amount of repayment to states and add to the debt burden of future governments.

“Chhattisgarh will get Rs 3,400 crore, it is interest free to repay in 50 years so each annual installment would be smaller. Yet it is money to be returned… It is neither a devolution nor a grant and it burdens us with borrowing because we have to present it as a capital expenditure. Are we in a position not to take it? We lack money, they shove things down our throats. Where is the option? We are losing more than that this year in GST and then every year we are going to lose Rs 5,000 crore in GST,” he said.

In the 2022-23 budget, states were allowed to borrow up to Rs 1 lakh crore from the Center through 50-year “interest-free loans” for making capital investments. In 2021-2022, the Center had granted additional Rs 15,000 crore to states for capital investment under a similar window. The budget proposed a capital expenditure increase of 24.47% to Rs 7.5 lakh crore from the revised estimate for 2021-2022 at Rs 6,02,711 crore.

Thiaga Rajan questioned the condition of no prepayment allowed. “On what logic does this make sense, what is the point of not allowing prepayment. If I’m the lender, I should be happier if it’s prepaid because I get it ahead of time where it actually means something,” he said.

Former Finance Secretary Subhash Chandra Garg said the apprehensions were understandable. “The central government used to give a lot of loans to the states for capital and other expenditures, but that was discontinued in 2005… By restarting this practice, the states would now remain indebted to the Center for 50 years. So, for such a small sum, the state could end up mortgaging its fiscal independence and sovereignty to the Center,” he said.

Questions addressed to the Ministry of Finance did not elicit a response. A senior finance ministry official, however, said that from now on, most states are required to obtain the consent of the Indian government under section 293(3), given their loan commitments in courses, including multilateral loans.

“All out-of-state loans are channeled through the GoI. The choice would be up to the States to remain untied and not to take this aid. Prepayment is a matter of terms and conditions. But who will take a high-cost loan to prepay zero-cost debt? said the official.

In an interview with The Indian Express earlier this month, Finance Secretary TV Somanathan said state capital spending would have a faster effect as it has a “wider geographical spread and greater diversity of projects” in relation to the investment expenditure of the Centre. Also, the state projects benefit small and medium-sized businesses more, he said.

According to Section 293(3), “a State shall not, without the consent of the Government of India, contract any loan if there remains to be repaid any part of a loan which has been made to the State by the Government of India or by its predecessor Government of India, or for which a guarantee has been given by the Government of India or by the government which preceded it”.

It further states that “consent under clause (3) may be given subject to such conditions, if any, as the Government of India may see fit to impose”.

Incidentally, in recent years the states as a whole have incurred a higher level of capital expenditure than the Union government.

States’ share of capital spending averaged 2.7% of GDP, compared to 1.7% for the Union government in fiscal year 2016-20, Fitch-group said. India Ratings and Research in a report.

A senior official said that while central projects such as railways, roads and electricity are essential to this plan, there are capacity issues and most central ministries are already operating at near optimal levels. The official view is that state governments “have done their part” over the past two years and needed to be incentivized.

Typically, when receiving funds, states tend to spend on tax expenditures, officials said. According to them, the long-term lending route gives government funds to spend on capital expenditure and there are signs that industrialized states such as Maharashtra and Gujarat are ready to take advantage of such funding to revitalize their investment programs.

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