The state of states: On lack of data on state’s finances

Source: This post is based on the article “The state of states” published in Business Standard on 13th October 2021.

Syllabus: GS3 – Indian Economy and issues relating to Planning, Mobilization of Resources

Relevance: Significance of data on states’ finances

Synopsis: Data of the Union Govt’s finances is made available at the end of every month. We need a similar kind of set up for states too.

Introduction

The Union government’s finances are routinely analysed and critically appraised, when its revenue and expenditure data are released by the Controller General of Accounts at the end of every month. These are unaudited and provisional numbers, but they do provide a broad idea about the state of the Centre’s finances.

On the other hand side, little analysis of the state governments’ finances takes place during the year. This is unfortunate.

What is the current scenario?

The data for the Centre’s revenue and expenditure are available for the first five months of 2021-22.

But only about 20 states have so far released their unaudited and provisional budget data for April-August 2021.

These cover all the major states except West Bengal, Bihar, Assam, Delhi and some of the smaller states, including a few in the north-east.

A quick analysis of the way these 20 states spent and collected their revenue in April-August 2021 shows how different their approach to budgeting is from the Centre’s.

What does the data of states’ finances show?

Increased overall expenditure than the Centre: In April-August 2021, their total expenditure grew by 13% over the same period of 2020 and by 11% over the same period of 2019.

In contrast, the Centre increased its expenditure only by about 2% over the last year and by 9 per cent over 2019.

During pandemic: Against the Centre’s 6 per cent rise in its total expenditure, the states’ spending had contracted by 2 per cent in April-August 2020. The rise in the states’ spending is contrary to the general impression that the states squeezed their expenditure in the first five months of the current year.

Higher revenue expenditure: The bulk of the rise in the states’ spending this year is on account of higher revenue expenditure.

In contrast, the Centre has kept a tight hold on its revenue expenditure, which contracted by about 1% year-on-year and rose by just 6% over the same period of 2019.

Collections of tax revenue: The contraction in tax revenue for both the Centre and these 20 states was about 30 per cent in April-August 2020.

Why is it important to have data on state governments’ finances?

Growing size of economy: Since the last 10 years, the combined size of state budgets has been higher than that of the Centre’s budget. The size of state budgets exceeded that of the Centre’s budget for the first time in 2011-12 by about 4 per cent. In 2020-21, the state budgets were about 22 per cent more than what the Centre spent.

Role in central finances: For instance, when governments are expected to spend more during or immediately after a pandemic, the focus is largely on the Centre’s expenditure pattern. Little attention is paid to the states, whose expenditure size has more firepower.

Accountability: the latest information on state budgets is not easily available and hence it cannot be used as an input for analysis, tracking the impact of the Centre’s revenue or expenditure on the economy.

What is the way forward?

First, there is need of centralised agency that compiles the data on finances of all the 30 states and makes them available on a monthly basis. The Reserve Bank of India does bring out a study of state budgets, but that being an annual publication becomes slightly dated.

Second, an early diagnosis of the slippage in the states’ fiscal performance should help. But the first task should be to ensure that all the states’ budget data are released with the same monthly frequency as has become the practice for the Centre.