Sunday, Oct 26, 2014

Just a Union budget

What has been fascinating about the India growth story, particularly over the last 10 years, is the remarkable improvement in governance at the state level. What has been fascinating about the India growth story, particularly over the last 10 years, is the remarkable improvement in governance at the state level.
Written by Neelkanth | Posted: July 12, 2014 3:05 am

Deep within us rests the desire for quick fixes, of happy endings. Simple narratives are, after all, less taxing on the mind and therefore more attractive. Nothing else can explain the inflated expectations from the presentation of the Union budget: broken system, new government, first speech and fixed!

Even before we get to what the government could have done, it’s worth questioning if the budget day hype is at all warranted.

Let’s start with economic salience. Shouldn’t we instead be focusing on state government budgets, given that they together spend nearly 40 per cent more than the Central government? Hasn’t their spending been growing at 17 per cent a year for the last four years, whereas Central government spending has grown at only 8 per cent? More importantly, isn’t their spending on education more than five times that of the Centre? Don’t they spend more than six times as much as the Central government on healthcare and nearly three times as much on rural infrastructure? While the Central government’s opening of new IITs and AIIMS gets ample media coverage, shouldn’t we also be interested in the efficacy of the far more critical spend on primary and secondary education, which are state subjects?

What has been fascinating about the India growth story, particularly over the last 10 years, is the remarkable improvement in governance at the state level, across many states. This is visible not just in the delivery of basic services but also in surprisingly disciplined state fiscal balances, with only a few exceptions. Encouragingly, this has been achieved through an increase in revenues. Tax collection efficiency, as measured by sales collected as a percentage of state GDP, has improved in all major states, and sales tax growth has compounded at a rate higher than 20 per cent.

Thus, while net Central government spending as a share of national GDP is at multi-decade lows and the fiscal deficit prevents any meaningful increase, total state expenditure as a share of national GDP is the highest since 2004 — and the combined state deficit is very much under control. So, from the perspective of economic importance as well as in terms of delivering basic social services, state budgets matter much more.

To digress a bit, in my view, this is the way it should be. Take the example of a larger neighbour whose wondrous growth we envy: the reforms unleashed by Deng Xiaoping in China in 1978 were more bottom-up, less top-down. He gave fiscal freedom to local governments, which then built up local infrastructure and industry at an unprecedented pace. Non-agricultural output of rural enterprises in China grew at a mind-numbing annualised rate of 26 continued…

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