Don’t Be Tight-Fisted

Context: Low spending and focus on fiscal consolidation by the states belie hopes of a public-spending-led recovery.

Broad state-level budget trends and their implications: Based on 11 states that account for a little over 60 % of India’s Gross Domestic Product (GDP).

• Decline of total expenditure: The Revised Estimates (RE) pegs their total expenditure to decline by around 6 % in 2020-21 from their Budget Estimates (BE). Reasons -
  • Collapse in state revenues and decline in the Central transfers
  • Reluctance of high-income states (like Gujarat, Maharashtra and Karnataka) to ramp up spending.
• Rise in revenue deficits: the collapse in revenues meant that states that usually borrow to finance capital expenditure have had to borrow to finance their recurring expenditure as well.
  • As a consequence, capital spending by states, which was budgeted to be around 50% more than that of the Centre in 2020-21, has been cut sharply.
  • This will also decrease their revue expenditure (allocations for pensions and salaries)
• Increased borrowings: Centre had raised the ceiling on their market borrowings from 3 to 5% of GSDP.
  • Of this, part was unconditional while the remaining was subject to fulfilling Centre-mandated reforms.
  • As per ICRA’s estimate, 17 states qualified based on the One Nation One Ration Card reforms, 15 qualified based on the ease of doing business reforms, seven partially completed power sector reforms, while six had completed the urban local body reforms.
  • But, it is only the low-income states of Bihar, Rajasthan and Madhya Pradesh with already stretched finances that have availed the borrowings, destabilizing their fiscal variables.
• Aggressive fiscal consolidation: The average fiscal deficit across these states is expected to fall by more than 1% of GSDP, more than twice the decline recommended by the 15th finance commission.
  • This fiscal consolidation is expected to be achieved not by expenditure compression, as is the case with the Centre, but by significant revenue enhancement.
  • A deterioration in fiscal marksmanship will mean that expenditure in the coming fiscal year will also end up being lower than what has been budgeted for.

Conclusion: For a broad-based recovery in a larger economy, greater government spending in the coming years is required.