Capital expenditure has been cut for police services, public construction and ironically various agriculture-associated sectors.

New Delhi: Uttar Pradesh’s expensive farm loan waiver has forced the Adityanath-ruled state to cut back on revenue and capital expenditure in key areas like energy, transportation, social welfare and nutrition.

The need to keep its fiscal deficit target below the 3% mark has clashed, predictably, with the equally pressing need to provide enough funds for the development of agriculture and industry sectors. This balancing act, according to a recently released SBI research report, will make it tougher for the state to transition from “Uttar Pradesh to Uttam Pradesh”.

For 2017-18, the state government has estimated its fiscal deficit to be Rs 42,968 crore, which is 2.97% of the state GDP.

According to the research report authored by SBI chief economist Saumya Kanti Ghosh, one way of looking at this fiscal deficit is how much of “capital expenditure of various services (Rs 53,258 crores and budgeted to decline by 26% in current fiscal as against a 12% increase in last fiscal) may be met from the revenue surplus. In the case of the Uttar Pradesh budget, given the huge fiscal pressures from loan waiver, the postulated decline in capital expenditure was difficult to avoid”.

While total capital expenditure presented in the UP budget is Rs 77,541 crore, as Ghosh points out, the number that people should look at is lower. "For states, the capital expenditure is composed of various services and the borrowings and loans and advances, which is Rs 24,000 crores in this case. Therefore, you should only look at Rs 53,258 crores, which the government can adjust," Ghosh told The Wire.

Decline in capital expenditure

An analysis of Uttar Pradesh’s budget shows that the decline in capital expenditure (capex) on various activities (general, social and economic) are across the board and are as much as 59% in some cases.

For instance, as seen in the table below, the capital expenditure under categories such as police services have declined by almost 58%. Much of the concern over these declines are whether they constitute a long-term trend. It also should be pointed out that revenue expenditure for police services is certainly higher – roughly Rs 15,000 crore, most of which has been allotted to hiring over 30,000 new police personnel.

However, the reduction in capital expenditure is still a worry, as the SBI report points out that “improving the law and order situation of UP is an efficient sine quo non” for the state’s economic development. The decline in capex for modernising Uttar Pradesh's police services comes in the wake of a critical Comptroller and Auditor General (CAG) report that has slammed the state government. The report notably notes that 48% of the state's police force uses ".303 rifles, which ahve been declared obsolete by the Ministry of Home Affairs more than 20 years ago".

While the Adityanath government has responded by saying that it is in the process of upgrading the police force's rifles over the next five years, the fact that money allotted towards this has declined is not an encouraging signal, according to experts.

The SBI report sums up the problems with reducing capex in the long-term: “Instead of building long term productive assets through capital expenditure... reducing the amount is not a positive sign for infrastructure deficient state like UP.”

Farm waiver, investment paradox

One of the more predictable outcomes of the massive farm loan waivers being seen across the country is while they are a solution to relieving rural distress in the short-term, they also result in a reduction of capital expenditure on agriculture and allied activities.

The table below shows how capital expenditure on agriculture and allied activities, rural development and irrigation and flood control has been slashed by on average nearly 30%.

“Providing farm loan waiver in one hand and at the same time, reducing capital expenditure on agriculture and irrigation, will not be a long term viable solution for an agrarian economy,” the SBI report notes.

Revenue expenditure side

For Uttar Pradesh, total revenue expenditure is estimated to be Rs 3,07, 119 crore – an increase of 25% (roughly Rs 62,218) crore over the revised estimate of FY 17.

However, as the SBI report points out, the lion's share of this (Rs 37,201 crore) goes towards the farm loan waiver. “To adjust this lump sum amount, the government has reduced expenditure [revenue and capital] on key activities like activities like energy (-51.5%), transportation (-11.8%), social welfare and nutrition (-25.1%).”

The report also points out that the cut in state spending is likely to be seen across states such as Rajasthan, Tamil Nadu, Punjab and even Maharashtra, with the “cut in capital expenditure in productive areas likely to act as a drag on growth for such states”.

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