A Deep Dive into State Budgets in India

Neel Kanth Mishra () and Prateek Singh ()
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Neel Kanth Mishra: Credit Suisse Research
Prateek Singh: Credit Suisse Research

India Policy Forum, 2018, vol. 14, issue 1, 53–106

Abstract: Over the past six years state government budgets have increased sharply, and states now collectively spend 87 percent more than the Union Government. In this period, not only has their expenditure as a share of India’s GDP increased from 14 percent to 18 percent, but they are, as a group, now nearly equal to the Central Government in terms of their annual borrowing from the bond markets. Most of the available research on state budgets focuses on aggregates like the total fiscal deficit and total borrowing requirements, or comparisons of states on standard high level ratios like own revenues as a share of GDP. While this sufficed when states were fiscally smaller, we need to step up analysis and scrutiny of state budgets as well as their regulation. In this paper we dig deeper into state budgets, looking at the sources that have driven this increase in expenditure, analyzing expenditure trends, and addressing, for example, the following questions: Can revenue expenditure be more productive than capital expenditure for some states? How has the greater devolution under the 14th Finance Commission affected social sector spending? We explore differences in the states’ revenue sources, their creativity in exploiting their tax opportunities, and the extent of their dependence on Central transfers. We find salary expenses to be mostly in control, but a worrying increase in the share of expenditure for pensions. Concerns around the states’ fiscal profligacy need to be tempered with the realization that the states’ fiscal deficits cannot rise without the Centre’s explicit approval: we explore the reasons behind and the impact of the spurt in farm loan waivers. We also dig into the impact of major changes like the start of GST and the target of 20 percent debt to GDP by 2023 prescribed by the Fiscal Responsibility and Budget Management (FRBM) Review Committee for state governments.

Keywords: State Budgets; Public Finance; India; Fiscal Policy (search for similar items in EconPapers)
JEL-codes: H7 H8 (search for similar items in EconPapers)
Date: 2018
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