State capex hits 2.7% of GDP under SASCI scheme: Report

The Scheme for Special Assistance to States for Capital Investment is a crucial tool for fiscal federalism and macroeconomic management. Introduced in the Union Budget, it provides 50-year interest-free loans to state governments to spur capital expenditure. Capex is vital because it creates durable assets (like roads and schools) and has a higher fiscal multiplier effect (generating more economic activity per rupee spent) compared to revenue expenditure (salaries, subsidies). The report highlights a critical issue: states with a high debt-to-GSDP ratio struggle to absorb these funds. This happens because rising committed revenue expenditures (debt servicing, pensions) crowd out (reduce the space for) capital spending, even when funds are available. UPSC often tests the difference between capital and revenue expenditure, and the macroeconomic impact of capex-led growth strategies.

The uneven utilisation of SASCI funds points to significant capacity and structural constraints at the state level. While the Union government provides the fiscal space through these long-term loans, the actual execution relies on state-level bureaucracy and project management capabilities. States like Madhya Pradesh and Rajasthan demonstrate strong absorption capacity, reflecting better project readiness and administrative efficiency in deploying capital funds. Conversely, lagging states highlight a governance challenge where the inability to plan, approve, and execute infrastructure projects limits their ability to leverage central assistance. This scenario underscores the importance of cooperative federalism, suggesting that mere allocation of funds is insufficient without capacity-building initiatives to help states overcome binding fiscal constraints and improve their capital budget execution.

The report intriguingly links capex utilisation to state demographics, noting that 'ageing states' (like Kerala) utilize SASCI less effectively than 'intermediate' or 'youthful states' (like Madhya Pradesh or Rajasthan). This demographic dividend angle is crucial for UPSC. Ageing states typically face higher burdens of social sector revenue expenditure, such as healthcare and pensions, which strain their fiscal space and limit their ability to co-fund or manage large capital projects. In contrast, youthful states have a more pressing need for physical and social infrastructure (schools, colleges, job-creating industries) to harness their demographic dividend, driving higher capex absorption. This illustrates how the demographic transition directly impacts state-level fiscal priorities and macroeconomic outcomes.