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Wednesday, November 25, 2020

17 state budgets, 1 story: Stressed fiscal, deep cuts in expenditure

All states, barring Assam, found their revenue receipts plummet through the current financial year. Bihar, for instance, saw its revenue receipts fall by around Rs 25,500 crore — roughly a fall of 14 per cent over the Budget Estimates.

Written by Udit Misra , Nushaiba Iqbal , Harish Damodaran | New Delhi | Updated: March 19, 2020 11:08:10 am
Most states have blamed lower devolution of tax revenues from the Centre for their current woes. (Illustration by C R Sasikumar)

As the coronavirus outbreak keeps the nation on edge, among the countless unknowns it has brought, there are only a few certainties. One is the fact that it’s the states, more than the Centre, that constitute the first line of defence in what could rapidly become a full-blown public health emergency.

How well manned and managed these states are will be a function largely of their finances. An analysis of 17 state budgets by the Express Research Group reveals that it’s not going to be easy.

Read | Potemkin Budgets: The state of state finances

For, these states may be staring at an actual revenue shortfall closer to Rs 3 lakh crore this fiscal vis-à-vis the numbers projected at the time of their last budgets. And it is states that account for nearly 69 per cent of the total government expenditures on health.

An analysis of the budgets reveals the following key trends across several states:

🔴 All states, barring Assam, found their revenue receipts plummet through the current financial year. Bihar, for instance, saw its revenue receipts fall by around Rs 25,500 crore — roughly a fall of 14 per cent over the Budget Estimates.

🔴 The fall in state revenues is largely due to a decline in the total taxes collected (a fraction of which is shared with the states) by the central government. This, in turn, is due to a slowing economy.

🔴 Less money in hand made states cut back on their total spending in the current financial year. Worse still, most states have budgeted meagre increases in expenditure for the next financial year (2020-21).

🔴 Some states, namely Bihar, Chhattisgarh and Assam, even propose to cut expenditure in 2020-21. For instance, Assam’s total expenditure next year will fall by 4 per cent even though it expects its economy to grow by over 9 per cent.

🔴 Spending cuts disproportionately affect capital expenditure, that is, money spent on building assets such as hospitals. For health care provisioning, this is bad news since, on average, most states spend only about 5 per cent of their total money on health — a far cry from the 15 to 16 per cent (on average) states spend on education.

🔴 Assam, Rajasthan, Gujarat and Himachal Pradesh typically spend the most on health while Bihar, Karnataka, Punjab and Haryana spend the least (as a proportion of their total expenditure).

🔴 States facing Assembly elections in the next 12 months saw a flurry of sops and freebies (such as free electricity)
being announced — both BJP and non-BJP states did this. A notable exception was Bihar, which seems to have run out of money with its fiscal deficit becoming three times the permissible limit.

🔴 Lastly, the latest budgets further underscore the weak credibility of state budget numbers. Data shows that there is huge (and consistent) gap between what the states promise they will earn in revenues and spend in the budget and what they actually do. There isn’t a single state that is an exception to this rule.

A sharp fall in the revenues of the states curtails their expenditure. And there are four broad reasons why state expenditures matter increasingly more for the wellbeing of the whole Indian economy.

Read | States spend 5% of their money on healthcare; 15% on education

One, over the past few years, states, taken together, spend one-and-half times more than what the central government spends through its budget. For instance, in 2017-18, the last year for which the final/actual numbers are available for all 31 states and Union territories, their aggregate budgetary expenditures were at Rs 29.25 lakh crore as against Rs 21.42 lakh crore of central government expenditure. So contrary to public perception, the combined effect of state budgets matters more than the central government budget.

Two, states employ five times more people than the Centre. Their ability to create jobs crucially depends on their ability to spend.

Three, each rupee spent by states has a higher “multiplier” effect on the domestic economy. In other words, Rs 100 spent on building physical infrastructure (such as a road) by the states manages to generate more economic activity than Rs 100 spent by the Centre.

Also Read | Electoral priorities dominate the budgets of five key states facing Assembly polls

Lastly, state-level expenditure on social schemes is considered more efficacious towards achieving goals of poverty alleviation and realising India’s demographic dividend.

That’s why translating talk of fiscal stimulus to boost growth or effectiveness of government in delivering essential public goods into action depends on the finances of states.

As their revenues plummeted this year, most states have been forced to cut expenditure in the current financial year. Some have had to project a cutback in the next financial year as well.

Most states have blamed lower devolution of tax revenues from the Centre for their current woes. Indeed, while presenting the state budget for 2020-21, Karnataka Chief Minister B S Yediyurappa lamented the Rs 11,887-crore revenue loss from the Centre’s lower tax transfers as well as compensation against GST collection shortfalls.

This, he pointed out, had created “an inevitable situation” of his government having to “cut down the expenditure of many departments” in the current financial year from April 2019 to March 2020. Yediyurappa’s statement is telling. Not just because coming from the CM of a state that is ruled by the same party at the Centre. It also captures the stressed financial positions of most state governments today.

For the 17 major states have come out with their budgets for 2020-21— the budgets of Madhya Pradesh and Andhra Pradesh are still awaited — there’s a yawning gap between the total revenue receipts originally projected for 2019-20 (also called budget estimates or BE) and the most recent revised estimates or RE.

The shortfall, arising from the RE being lower, works out to Rs 105,636 crore. This is almost comparable to the Rs 112,660-crore difference reported for the Centre in 2019-20, going by Finance Minister Nirmala Sitharaman’s latest Union Budget for 2020-21 (see table).

In the coming days, one can expect states to rely more on their own revenue sources rather than Central or goods and services tax (GST), whose collections have suffered in a slowing economy and may take a further hit amid the uncertainty unleashed by Covid-19.

The one source they will certainly tap is petro-products, which are outside the purview of GST. In the current crude crash scenario, some states have already taken the lead in hiking the value-added taxes on transport fuels. And more are likely to join.

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