State budgets mirror the social and economic priorities of the state government, transcending political rhetoric. Some of the states stand as stark reflections of the systemic failures plaguing our economic and political landscape. The divergence between articulated priorities and actual allocations exposes a systemic decay where populism takes precedence over responsible governance.
This distortion, evident in government spending, underscores a disconcerting reality–the hollowness of purported economic and social commitments. This distortion not only jeopardises the economic well-being of states but also erodes the foundation of collaborative federalism, reducing it to a mere façade in the face of rampant political manoeuvring.
The Reserve Bank of India report underscores Tamil Nadu, Uttar Pradesh, Maharashtra, West Bengal, and Rajasthan’s substantial contributions, pushing India’s state governments and Union Territories to a record-high total debt in the financial year 2022–23. This surge in liabilities signals a significant annual increase, emphasising the fiscal challenges faced by these states. The recently published RBI’s report on ‘State Finances: A Study of Budgets of 2023–24’ further underscores the fiscal challenges across many states.
Despite a marginal improvement, with states’ debt projected to decrease to 29.5 per cent of GDP in 2022–23 from 31.1 per cent in 2020–21, it remains above the 20 per cent threshold recommended by the Fiscal Responsibility and Budget Management Act, 2003, Review Committee. This glaring deviation demands an immediate and unwavering focus on debt consolidation.
The RBI study sternly advocates a shift in mindset: states should prioritise capital planning for sectors like health, education, infrastructure, and green energy transition rather than treating them as expendable items subject to cutbacks to meet budgetary targets. Furthermore, the study asserts that states must actively promote and facilitate increased inter-state trade and businesses to harness the full spillover benefits of state capital expenditure throughout the nation.
The introduction of the Goods and Services Tax (GST) has resulted in heightened tax buoyancy for the states. Although the states exhibit robust overall tax efforts, sustained enhancement of tax revenues necessitates fortifying their tax capacity, which entails embracing tax reforms and adopting innovative and effective tax administration practices.
Additionally, non-tax revenues present a substantial opportunity for augmentation, achievable through revising user charges on electricity, water, and various public services, revisiting royalties and premiums derived from mining activities, and implementing improved financial management strategies for their Public Sector Undertakings (PSUs).
Despite the study’s insights, numerous challenges loom over state finances. The regressive move of some states reverting to the old pension scheme not only signifies a fiscal burden but also jeopardises the leeway they have for increased capital spending.
Although the fiscal position of states, on the whole, has witnessed enhancement, not all share in these commendable improvements. Certain states persist with alarmingly elevated debt and deficit levels. Compounding these issues, the relentless tendency of political parties in both the mentioned states and others to announce fiscally imprudent schemes, particularly in the run-up to elections, serves only to exacerbate an already precarious situation. It is imperative for states to demonstrate fiscal responsibility and resist succumbing to short-sighted, politically motivated financial decisions that undermine their long-term economic well-being.
In parallel, another interesting study of states by Shamika Ravi (Member, Economic Advisory Council-PM) and Mudit Kapoor of the Indian Statistical Institute, titled ‘State Budgets in India: Time Trend Analysis from 1990 to 2020, imparts crucial insights to two key stakeholders: the upcoming 16th Finance Commission, urging immediate attention to state pension programs and the structure of public debt; and NITI Aayog, positioned as a pivotal platform for states to exchange best practices in financial management, administrative efficiency, and capital outlay structuring.
Their analysis, examining time trends and the composition of revenue, expenditure, and capital outlay, sheds light on the evolution of priorities across states in the past thirty years. State budgets are compared in terms of per capita metrics and the Net State Domestic Product (NSDP), offering valuable perspectives during different economic development phases.
Furthermore, upcoming Assembly polls and next year’s Lok Sabha elections have triggered a wave of pre-election incentives and giveaways. This includes some administrations considering a return to the old pension system (OPS), ensuring defined returns for retiring government employees, thus reigniting scrutiny on states’ fiscal discipline. The research emphasises per-capita levels, recognising the state budget’s people-centric nature, and facilitating comparisons across states of varying population sizes.
Their examination of expenditures delves into both development and non-development categories, encompassing interest payments, debt servicing, pensions, and administrative services. Non-development expenditures offer insights into the state’s effectiveness in addressing social and economic priorities.
The report indicates a substantial increase in the ability of high-growth states to generate their own tax revenues, with over 50 per cent of income coming from taxes in states like Gujarat, Tamil Nadu, Haryana, Maharashtra, and Karnataka. In contrast, low-growth states such as West Bengal, Assam, Uttar Pradesh, Chhattisgarh, and Jharkhand rely more on central taxes or grants, with their own tax revenue falling below 40 per cent.
Punjab, once exceeding 50 per cent of its own tax revenue share until 2008, experienced a sharp rise to 60 per cent in 2010, followed by a notable decline. Recent years have witnessed a significant increase in Punjab’s reliance on grants from the Centre, suggesting a shift in the economic landscape of the states.
States must focus on generating revenue from sustainable sources to ensure financial stability and resilience, avoiding the pitfalls of volatility that can undermine long-term fiscal health. In addition, state expenditure moulds the socio-economic landscape by directing financial resources towards key sectors, influencing development, infrastructure, education, and healthcare, thereby playing a pivotal role in shaping the overall well-being and progress of society.
(To be concluded)
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