India, Jan. 12 -- The Union budget is the most important economic policy event by a distance on the annual calendar. Without prejudice to its importance for the economy at large, it is worth underlining that the states, put together, spend more than the Centre in India. This makes the fiscal priorities of the states a very important driver of overall economic fortunes. It is in this context that the role of capital spending by the states cannot be overemphasised. Capital spending is necessary to plug supply side gaps in India's infrastructural setup, which if done well, can unlock growth and give a boost to future incomes apart from driving present day demand. India's fiscal federalism has made a gradual pivot away from the autonomy enjoyed by state governments in the post-GST era. Barring some heads such as excise and fossil fuel taxes, states don't really have an option to tweak their tax rates. That makes fiscal capacity a largely predetermined variable for states, where revenue is just a function of higher growth or lower spending. This economic environment has developed along with a political environment where rising demands for schemes such as cash transfers are putting increased pressure on state finances from the revenue expenditure side. Given the fact that states face a far more stringent FRBM (fiscal regulation and budgetary management) framework than the Centre, it has led to a situation whether either debt or capital spending is likely to end up reflecting the adverse effects of the fiscal squeeze. It is here that the idea of interest-free loans from the Centre to the states, for capex, was broached in the Union budget a couple of years ago - and then launched. In its purest and simplest form, the scheme helps safeguard capital spending across states with a relaxed debt overhang for state governments. An HT report published on Sunday says that a pre-budget consultation with state finance ministers reflected an overwhelming sentiment for this scheme to be continued in the forthcoming budget. While a lot of state governments in India are of the same political disposition as the government at the Centre, and therefore, some policy congruence is to be expected, states using this scheme to boost their capital spending is a heartening development. It will be a good idea for either the Union finance ministry or RBI to put together the facts on the kind of capex the states have undertaken using this scheme in the near future....