The article highlights the trends emerging from the State budgets which dashes the hopes of public-spending led economic recovery.

State-level budget trends

• Over the past few weeks, several state governments have presented their budgets for the financial year 2021-22.
• The states, put together, account for a larger share of general government spending than the Centre.
• States’ spending stance is pivotal to the hopes of a government spending-led economic recovery.

5 Broad trends from the state budgets

• The broad state-level budget trends are based on 11 states that account for a little over 60 per cent of India’s GDP.

1) Offsetting the additional spending by Centre

• There is a collapse in states’ revenues and transfers from the Centre.
• Along with it, there is a “reluctance” among some states to borrow more to spend.
• Thus, the aggregate level spending by these states in 2020-21 will end up being lower than what they had budgeted for before the onset of the pandemic.
• The revised estimates peg their total expenditure to decline by around 6 per cent in 2020-21 from their budget estimates.
• If these trends were to hold for the other states as well, then it would imply that the additional spending by the central government, over and above its budget estimate is likely to be offset by the decline in spending by states.

2) From revenue surplus to revenue deficit

• This year, states which typically run revenue surpluses will run revenue deficits.
• The collapse in revenues meant that states that usually borrow to finance capital expenditure have had to borrow to finance their recurring expenditure (revenue expenditure) as well.
• As a consequence, capital spending by states has been cut sharply.
• States, though, expect the situation to reverse in the coming fiscal year, with most projecting a return to revenue surpluses even as the Centre will continue to run revenue deficits.
• This anomaly is unlikely to be resolved unless the root cause of the situation — the nature of the fiscal compact between the Centre and the states — is addressed.

3) Reluctance by states to borrow

• The Centre had raised the ceiling on their market borrowings from 3 to 5 per cent of GSDP.
• Of this 2 percentage point increase in the borrowing limit, part was unconditional while the remaining was subject to fulfilling Centre-mandated reforms.
• As per ICRA’s estimate, 17 states qualified based on the One Nation One Ration Card reforms, 15 qualified based on the ease of doing business reforms, seven partially completed power sector reforms, while six had completed the urban local body reforms.
• But, it is only the low-income states of Bihar, Rajasthan and Madhya Pradesh with already stretched finances that seem to have availed the additional borrowing space.
• The high-income states of Gujarat, Maharashtra and Karnataka, all of whom had greater fiscal headroom going to the crisis, and were better placed to borrow more and spend, have not done so.

4) Aggressive fiscal consolidation

• As is the case with the Centre, states have, remarkably, budgeted for aggressive fiscal consolidation next year.
• The average fiscal deficit across these states is expected to fall by more than 1 percentage point of GSDP, more than twice the decline recommended by the 15th finance commission.

5) Ambitious revenue assumptions

• The aggressive consolidation next year is expected to be achieved not by expenditure compression, as is the case with the Centre, but by significant revenue enhancement.
• However, some revenue assumptions are quite ambitious, to say the least — some states have pegged their GST and VAT collections to grow far in excess of 30 per cent in 2021-22.
• A deterioration in fiscal marksmanship will mean that expenditure in the coming fiscal year will also end up being lower than what has been budgeted for.

Consider the question “The pandemic has upended the States’ fiscal space, which is evident in their budgets. In light of this, examine the trends emerging from the budgets of the States and their implications for the economy.”

Conclusion

Subdued general government spending during these tumultuous years heightens the risks to economic recovery. Considering the possibility of the economy exiting from this period with lower medium-term growth prospects, there is a strong case for greater government spending during these years.

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