What prevents states from spending?
While replying to the Supplementary Demands for Grants discussion in the Parliament, the Union finance minister made a startling revelation: As on 30th November 2021, the unspent cash balance surplus of all states was `3.08 lakh crore. Out of 28 states, only two states had negative cash balance. Though she did not reveal the name of the states, I can vouch that one was surely Kerala. The southern state’s treasury was on ways and means advances almost on a daily basis since the breakout of Covid. It is indeed very strange that even though the RBI had doubled the limits to ways and means advances, most of the states had chosen not to utilise the additional fiscal space and accumulate surplus in the cash balance.
It is the context that makes it scandalous. Covid pandemic resulted in a collapse of employment and income of the labouring population, not only the wage workers but also the self-employed. Even though employment and income generation have seen positive growth, the economy has not climbed back to the pre-Covid levels of 2019–20. People have had to adopt various survival strategies because the transfer from the governments in money and kind were meagre. The Indian government’s response has relied more on monetary measures rather than fiscal ones to mitigate loss and stimulate growth.
As a result, there has been a ballooning of household debt for consumption purposes. According to SBI’s Ecowrap, the household debts escalated at an astounding rate of 31% per annum between 2018 and 2021. In contrast, between 2012 and 2018 the rural debt was growing only at 15% per annum and urban debt at 7%. With the banks shying away from consumption loans, the households had no recourse other than to borrow from money lenders or their new avatars of NBFCs and MFIs who control most of the SHG networks other than in some states like Kerala. The Centre for Monitoring Indian Economy’s (CMIE) Consumer Pyramid Survey clearly indicates a shift away from banks to SHGs in availing credit. A recent survey of indebtedness during Covid indicates that the median rate of interest was around 24%. The usurious interest rate added more misery to the households.
The outcome is out there for everyone to see: Hunger and virus stalked people who died due to lack of oxygen and minimum healthcare facilities or while trekking back to native places. The analysis of sample registration data of birth and death has revealed excess fatalities when compared to pre-Covid years on a scale that would dwarf the colonial period famines. When faced with such a situation, the last thing one would expect from concerned state governments, which are nearer to the people, is to shirk the responsibility to provide support to the people in cash or kind. We are staring at the stark truth—they permitted the money to lie idle in the treasury. Why did states not spend?
The strange phenomenon of treasury surplus emerged around 2000 and was around `50,000 crore around 2005. In my first budget speech in 2006, I had spent more than a page dissecting it and vowing that Kerala would never follow the path. Kerala has adopted the stand that the expenditure on education and healthcare should be counted as investment in human resource development and the state was in no way willing to reduce it to meet an accounting rule.
By 2019–20, the treasury surplus had increased to nearly `2 lakh crore. The expectations were that under the fiscal stress of Covid, the surplus would evaporate. But it was a great surprise that the Annual Report of RBI revealed that in 2021 March it had increased to nearly `2.5 lakh crore. And now, the Union finance minister confirms that after a few months, in November, it scaled a new peak of `3 lakh crore. Even the poor states have high surpluses—Bihar `17,390 crore; UP `19,880 crore; MP `11,280 crore; Uttarakhand `19,880 crore; Rajasthan `5,807 crore and so on. (With reference to 2019–20)
The RBI automatically invests the treasury surplus in 14-day Government of India securities at less than 3.7% interest rate on behalf of the states. Most of the funds would have been from the market borrowings of the state government at around 7%. In a way, the state governments are subsidising the Union government’s borrowing program. Instead of bearing this loss, why don’t the states spend the money?
States do not spend because there are legal constraints on doing so. The Union government and successive Finance Commissions have forced the states to pass Fiscal Responsibility and Budget Management (FRBM) legislations. Accordingly, states must eliminate revenue deficit and reduce fiscal deficit to 3% of GSDP. The latter target is easily enforced because borrowings by the state governments require prior permission of the Union Government. Eliminating the revenue deficit is a much harder task. Revenue expenditure must be contained within the revenue receipts. No part of the borrowing can be used for meeting revenue expenditure.
Nevertheless, the states have by and large complied with the requirement for elimination of the revenue deficit; and during the four years in 2000s, they were on revenue surpluses. In contrast, the Central government has flouted the law. Its fiscal deficit has always been much above 3% and revenue deficit above 2.5% during the 2000s. This asymmetric impact of FRBM has not deterred most of the states from being more loyal than the king in pursuing fiscal targets. Even under Covid conditions they would not cross the neoliberal “fiscal Lakshmana Rekha” and shy away from utilising the borrowed funds for the welfare of the people in general and health support in particular. The treasury surplus is a perverse outcome of the FRBM Act. It also goes to point out how our state machinery and functionaries have become incarnations of neoliberalism.