Decoding State Budgets

Source-This post on Decoding State Budgets has been created based on the article “Decoding state budgets: Can growth projections keep pace with reality?” published in “The Indian Express” on 12 April 2024.

UPSC Syllabus- GS Paper 3 – Government Budgeting

Context – In India, the central government’s finances are closely examined whereas state governments’ fiscal health often receives less attention. However, there is a renewed interest in the financial status of states because of the rise in market borrowing by state governments.

What is the publicly available information on state government finances?

1) State Budgets -They are a good source of publicly available information on state government finances.

2) CAG –There is publication of monthly fiscal indicators by the CAG. This is useful in assessing emerging trends in state finances.

3) Other important source – They are states’ usage of ways and means advances and overdraft facilities extended by the Reserve Bank of India.

What is the analysis of the 2024-25 budgets or votes on account (VoA)?

An analysis of the data suggests that states expect a 9.2 % growth in their combined revenue receipts this year.

1) Revenue side of states–

A) About half of the total income for states comes from their own taxes.

B) Another 40-45 per cent of the revenues of the states comes from transfers by the Centre, taxes and grants. States saw an increase in their revenues due to higher-than-expected tax sharing for three years in a row during FY2022-24.

2) Expenditure sides of states-

States plan to increase their revenue spending by 7% and their capital spending by 11%. However, due to elections this year, there will be less capital spending by states till final budget is presented in July 2024.

What are the issues with grants from the Centre to the states?

1) Uncertainty in transfer of additional devolution– In many cases, states may have deviated from their planned borrowing because they had no prior knowledge about the timing of inflow of such additional devolution by Centre.

2) Multiple factors– There are many factors on which center gives grants to states for Centrally Sponsored Schemes (CSS). For ex- submitting utilization certificates. Thus, actual grants from the Centre to the states differ a lot from what the states expect.

Read more- Fiscal Centralisation In India

What is the reason behind larger market borrowing by states?

1) States may have preferred to hold larger cash before the model code of conduct period, driving some states to expand their borrowings.

2) Some states may have decided to utilize more of their borrowing limit for 2023-24 before the year ends.

Question for practice

What are the issues with grants from the Centre to the states? How can it lead to a larger market borrowing by the states.