During the current financial year, 17 major states have budgeted for a 10.8 per cent rise in spending, compared with 19 per cent last year, making this the slowest pace of increase in at least 13 years. As a result, general government spending is expected to grow 7.8 per cent this year, less than half the 17 per cent rise recorded last year, a study by Motilal Oswal economist Nikhil Gupta showed.
But the good news is that at 7.8 per cent, the pace of increase in revenue spending is lower than capital spending, which creates assets and generates jobs. Capital expenditure is projected to rise by 14 per cent, faster this year than the long-term average growth of around 12 per cent. Given that nearly 84 per cent of states’ budgets goes toward revenue spending, such as interest payments, there is very little left to undertake productive spending.
Devendra K Pant, chief economist at India Ratings, said, “Indian states are providing support to investment growth. The subdued investment is possible only because of the capital spending by the states. After the 14th finance commission award, the general apprehension was that states would spend on current consumption. On the contrary, the states have spent more on capital expenditure. On average, states spent 60 per cent of their capex on building roads and bridges, power, and irrigation.”
This year too, the highest share of allocation is towards irrigation and flood control (23 per cent), followed by transport (19 per cent) and energy (8 per cent). Of the overall revenue spending, education (18 per cent) tops the list, followed by interest payments (12 per cent) and pension (11 per cent).
But the real worry is the inability of states to increase the share of own tax revenue. States raise resources from four key areas — own taxes, non-tax receipts, share of central taxes and grants from the Centre. Although tax collections are budgeted to grow at over 14 per cent, the highest in five years, as a percentage of GDP it remains a modest 6.5 per cent.
States are increasingly relying more on the Centre to meet their funding needs as the growth in states’ own receipts has significantly lagged the rise in support from the Centre, which comes in the form of tax transfers and grants. While Centre’s support has increased by nearly 30 per cent in the past three years, states’ own resources grew by only 10 per cent per annum between 2013-14 and 2016-17, the report said.
Just three years ago, support from Centre was estimated at around 60 per cent of states’ own tax receipts, but now they are nearly equal following the recommendations of the last finance commission.