Whalesbook
### Scheme Use Varies Across States
Research from State Bank of India (SBI) shows that the Scheme for Special Assistance to States for Capital Expenditure (SASCI) is not being used equally by all Indian states. Ageing states, where 15% or more of the population is aged 60 and over, have used SASCI funds at an average rate of 74.5%. This is lower than the 80.6% seen in states with mixed demographics and the 83% used by younger states. SASCI, launched in October 2020, provides 50-year interest-free loans to encourage state government spending on capital projects, especially when budgets are tight. The differences in usage suggest that a state's age profile plays a role in how well it can absorb these funds for new projects.
### Ageing States Face Budget Hurdles
The financial effects of changing demographics are growing for Indian states. Ageing states face two main problems: a shrinking tax base as the working-age population declines, and increasing essential spending like pensions and loan interest. Studies show ageing states often have higher debt compared to their economic output (debt-to-GSDP) and pay more in interest relative to their income. States such as Kerala and Tamil Nadu are already in this category. Himachal Pradesh, Punjab, and Maharashtra are also expected to join them soon. This trend means these states may find their ability to manage budgets increasingly limited, affecting their capacity for new capital projects, even with central government help.
### Scheme Funds Often Replace State Spending
A key finding from the SBI analysis is that SASCI funds don't add much to total capital spending by states. The report estimates that for every rupee of SASCI funds provided, total capital spending increases by only about 67 paise. This means roughly 33 paise of the funds are used by states to cut back on their own investment, a problem called 'crowding out.' This effect is stronger in states already running budget deficits, where up to 55 paise of their own spending might be displaced for every rupee of SASCI received. While SASCI does support overall spending, a large part doesn't create new investment, potentially weakening the scheme's intended economic boost. Some reports also suggest that a portion of reported state capital spending might actually be loans and advances, rather than direct creation of assets.
### Concerns Over Scheme's Effectiveness
The uneven use of the scheme and the 'crowding out' effect raise concerns about the financial health and long-term growth of many Indian states. States with ongoing budget deficits and high debt, like Punjab, West Bengal, and Kerala, are especially vulnerable. Relying too much on central schemes like SASCI, even though they provide needed cash, risks hiding deeper financial problems and discouraging states from earning more revenue. The shift towards an older population adds to these challenges by putting constant pressure on state budgets. If states use central funds to replace their own planned capital spending, overall growth in useful infrastructure may slow down. Spending could also become less effective, leading to more debt without creating enough new assets.
### Improving State Capital Spending
Despite these issues, the central government has indicated ongoing support for state capital spending projects, recognizing that infrastructure is vital for economic growth. However, there's a growing focus on encouraging states to spend more effectively and ensure new investments truly add to their capital budgets. The success of SASCI, and state-level infrastructure development overall, will depend on states managing their budgets well, increasing their own income, and making sure central funds add to, rather than replace, their own projects. The main challenge is promoting self-funded capital investment, especially in states dealing with demographic changes and existing budget limits.