States push for more fiscal room, seek expansionary Union budget

States also advocated that macroeconomic challenges should be comprehensively addressed in the Union budget. Punjab and Kerala sought special financial packages including more loans, grants, and borrowing flexibility.

Ministers from 28 states, including some of the chief ministers and deputy chief ministers, attended Union finance minister Nirmala Sitharaman’s budget consultations on Friday in Jaisalmer. Officials from Delhi, Nagaland and Chhattisgarh attended the meeting in place of their ministers.

“States urged for an increase in borrowing limits to support fiscal activities and highlighted the need for state-specific road development and railway projects. Some states asked the central government to bear a larger share of land acquisition costs for projects," said a person informed about discussions between the Centre and states.

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“The size of the government expenditures at both national and state levels are vital for achieving faster economic growth as demonstrated by most developed nations," Kerala finance minister K.N. Balagopal said at the meeting.

Balagopal said the state was on a path of fiscal consolidation, but it was essential to recognize that if achieved through restrictions in government expenditure, it may not necessarily be a desirable outcome and may even hinder economic growth and render fiscal consolidation efforts counterproductive.

The minister sought a ₹24,000 crore special package spread over two years and a ₹2,000 crore package for the next financial year for offering relief to families affected by the landslide in Wayanad in July, showed a copy of the minister’s speech seen by Mint. Balagopal told Mint that when states enhance their expenditure, it leads to growth, which in turn will enhance revenue collections.

Centre’s capex support

States asked the central government to raise the allocation for the 50-year interest-free loans given to them, and greater flexibility in its usage. For FY25, the Centre has allocated ₹1.5 trillion as special assistance as loan to states for their capital expenditure.

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Centre’s total allocation to states for capex in the current financial year is ₹3.9 trillion, as per union budget documents.

Punjab finance minister Harpal Singh Cheema told reporters after the meeting that the state has sought “an industrial package of ₹1,000 crore for border districts like Pathankot, Amritsar and Gurdaspur".

States’ request for greater financial support from the Centre and greater leeway for borrowings come at a time the economic growth rate has slowed to a seven-quarter low of 5.4% in July-September, compared with 6.7% growth in the first quarter and an 8.1% in the year-ago period.

Centre’s fiscal support to states, especially for infrastructure creation, is a growth driver, according to a study of state budgets released by the RBI on Thursday.

The improvement in the quality of states’ expenditure was sustained, with capital expenditure rising from 2.4% of GDP in 2021-22 to 2.8% in 2023-24 and budgeted at 3.1% of GDP in 2024-25, RBI said in its report ‘State Finances: A Study of Budgets of 2024-25'.

States also emphasized the need for additional funding for disaster relief and sought more allocation for the state disaster response fund (SDRF). An increase in the honorarium paid to Accredited Social Health Activists (ASHA) workers was also on their wish list.

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Some states asked for the release of funds quickly by the Centre and extra funds for interlinking rivers.

Gireesh.p@livemint.com