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State Budgets, spending, and economic recovery
Read more on - Polity | Economy | Schemes | S&T | Environment
- Economy at state level: Several state governments have presented their budgets for the financial year 2021-22. States have spent less in this year, and may focus on fiscal consolidation in the year to come, weakening the hopes of a public-spending-led recovery.
- Projection on spending: There was much a collapse in states’ revenues in the last fiscal given the pandemic times. Transfers from the Centre thus become a key aspect in the last financial year. This was coupled with a “reluctance” among some states to borrow more to spend. So at the aggregate level, spending by these states in 2020-21 will end up being lower than what they had budgeted for before the onset of the pandemic. The revised estimates peg their total expenditure to decline by around 6% in 2020-21 from their budget estimates.
- Extrapolation: These are based on 11 states that account for a little over 60% of India’s GDP. These trends may hold for the other states as well. In that case, the “additional” spending by the central government, over and above its budget estimate, is likely to be offset by the decline in spending by states. In effect, the total general government spending may end up being around or even lower than what was budgeted for before the onset of the pandemic.
- Revenue status: This year, states which typically run revenue surpluses will run revenue deficits. The revenue collapse meant that states that usually borrow to finance capital expenditure have had to borrow for recurring expenditure as well. As a result, capital spending by states, which was budgeted to be around 50% more than that of the Centre in 2020-21, has been cut sharply. The states had to cut back even on some of its revenue expenditure. Notably, most of these states have cut back on allocations for pensions. Some have even slashed allocations for salaries this year.
- Gap among the states: Some of the states did have the leeway to boost spending by borrowing more. The Centre had raised the ceiling on their market borrowings from 3 to 5% of GSDP.
- Of this 2 percentage point increase in the borrowing limit, part was unconditional while the remaining was subject to fulfilling Centre-mandated reforms. Several states did qualify to undertake the conditional borrowings.
- But, it is only the low-income states with already stretched finances that seem to have availed the additional borrowing space. [These include Bihar, Rajasthan and Madhya Pradesh; their budgeted fiscal deficit for 2020-21 was pegged at 3% or above before the pandemic.]
- They were thus able to either maintain or exceed their budgeted expenditure levels.
- In comparison, the high-income states of Gujarat, Maharashtra and Karnataka, that were better placed to borrow more and spend, have not done so.
- The economic hit from the pandemic is thus uneven.
- Crisis is home: The growth projections accompanying these budgets suggest that some states expect to do better than others. But, considering the extent of the crisis, there has to be far greater spending than what is visible in these budgets.
- Scope for fiscal consolidation: As is the case with the Centre, states have, remarkably, budgeted for aggressive fiscal consolidation next year. The average fiscal deficit across these states is expected to fall by more than 1 percentage point of GSDP. This is more than twice the decline recommended by the 15th finance commission. This aggressive consolidation is expected to be achieved not by expenditure compression, as is the case with the Centre, but by significant revenue enhancement. However, some revenue assumptions are quite ambitious, e.g. some states have pegged their GST and VAT collections to grow far in excess of 30% in 2021-22
- The way ahead: Subdued general government spending during these crisis years heightens the risks to economic recovery. Economy may exit from this period with lower medium-term growth prospects. Given this, there is a strong case for greater government spending during these years. The states, put together, account for a larger share of general government spending than the Centre. Their spending stance is thus pivotal to the hopes of a government spending-led economic recovery.
- Knowledge centre:
- Centre versus State govt. spending - Throughout India’s history, the centre had an oversized share in the use of public funds. But the constitutional division of subjects put more onerous welfare obligations on state governments. Since 2000, successive finance commissions have tried to allot more funds for state governments to correct the imbalance. From the 11th finance commission to the 14th, the share of net proceeds recommended to be devolved to states increased each time: from 29.5% to 30.5% to 32% to 42%. Net proceeds are defined in Article 279 of the Constitution as gross tax revenue of the centre less surcharges and cesses, and cost of collection. About two-thirds of India’s public capex comes from states, the highest decentralization of capital spending globally. India’s coalition era, in which regional parties held sway over Delhi ensured that there was broad-based political support for such a shift. As a result, in several critical areas of spending, such as capital expenditure, state governments came to assume the leading role. With a strong BJP govt., trend has reversed.
- Pandemic and state revenues - The pandemic-induced lockdown had a crippling effect on already weakened state finances. The centre contributed to some of this fiscal stress, by delaying GST compensation cess, and by lowering the amount available for the divisible pool through cesses and surcharges. States are not blameless either. Populist programs such as farm loan waivers contributed to the current fiscal stress, without doing much to raise farm incomes. The rather tepid performance of the power debt restructuring scheme, UDAY, also strained state finances. The last blow came from Covid-19, and the lockdown that followed. The initial ban on liquor, the sharp fall in mobility, which hit fuel stations hard, and the slump in the property market during the lockdown hit state governments hard as they are heavily dependent on liquor, fuel, and real estate for revenues.
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