NEW DELHI: The burden of public spending is set to get heavier for states with the governments announcing a series of additional expenditure measures to spur economic activity and combat the adverse impact of the health crisis.
In recent years, states have cut back capex by almost 0.5 per cent of GDP to rein in their fiscal deficit with the cut in 2019-20 being the steepest at 0.6 per cent of GDP. Yet, the state governments remain big spenders, particularly on developmental works.
Taken together, the share of state expenditure as a share of GDP is in the range of about 19.2 per cent, while the Centre’s share is about 13.3 per cent of GDP in FY20.
Until 2011-12, the Centre and the states together spent roughly similar shares of the GDP on all forms of expenditure.
However, there has been quite a sharp divergence after 2013-14, with states spending significantly more in terms of GDP proportion. Their total expenditure rose from 15.5 per cent of GDP in FY12, whereas the Union government registered a plunge from 14.9 per cent.
The Centre-States ratio in the latest year stood at 41-59 per cent, according to RBI’s Handbook on Indian Economy.
The composition of the spending also varies with key subjects like public health and agriculture being part of the state list, while education and labour welfare are part of the concurrent list.
Out of the total developmental expenditure of Rs 38.6 lakh crore for FY20 (BE), around 65 per cent of the spending is done by the state government.
The gap in case of education is perceptibly higher between Centre and states with the latter accounting for 14.3 per cent of aggregate expenditure compared with Centre’s 3.5 per cent.
Despite the rapid spike in spending, the state governments have to depend on New Delhi for revenue receipts, while the avenues of revenue for the Centre are higher.
Interestingly, the outstanding market borrowings for both central and state government have an equal share of 57 per cent in total outstanding liabilities.
The combined borrowings in FY20 was Rs 15.6 lakh crore, of which the share of state governments is 41 per cent, rising steadily from 18 per cent in FY11.
Yet, the central government debt to GDP ratio is 51.7 per cent as of FY20, almost double than that of the state.
In terms of fiscal deficit, the state’s share in the combined gross fiscal deficit and revenue deficit was estimated at 46 per cent and 22 per cent, respectively, for FY20.
This is notably higher than 31.1 per cent and 8.4 per cent recorded in FY12. As for the Budget 2020-21 estimates, the pandemic has caused considerable distortion.
States are expected to cut back on capex spend more significantly this fiscal due to Covid-induced strain on finances with estimates suggesting the aggregate cut in their budgeted capital spending to be in the range of Rs 2.5-2.7 lakh crore.
The Reserve Bank expects states’ fiscal deficit in the current financial year to breach 4 per cent of the GDP target.