States also flout Budget numbers discipline
More attention needs to be focused on state Budgets
Every year, after the Union Budget is presented, a lot of debate and discussion takes place over its financial outlays and policy initiatives. This is understandable and also desirable. The Union Budget for 2020-21, presented last month, was no exception. However, the annual Budgets presented by different state governments rarely receive the kind of attention that the Union Budget routinely gets from commentators and economists alike.
This is a problem. For instance, the size of the Budgets presented by 31 state/union Territory governments with Assemblies was estimated at over ~37 trillion in 2019-20. This is 37 per cent more than the size of the Union Budget for 2019-20, estimated at about ~27 trillion. In other words, the combined impact of all the state Budgets on the Indian economy will be more than that of the Union Budget. In all fairness, the state Budgets should not receive the kind of negligent treatment that they receive from commentators and economists.
This neglect could be an outcome of the manner in which various state governments present their respective annual financial statements. Not all of them follow an established and uniform pattern of presenting their financial outlays. Thus, analysing these annual financial statements can be a challenging and even frustrating exercise. The Reserve Bank of India (RBI) does bring out an annual compendium of all the state Budgets, but this comes with a time lag and rules out an early analysis of the state Budgets.
In the last few weeks, as many as nine states have presented their annual Budgets for 2020-21.
These states are Bihar, Haryana, Kerala, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal. Their combined gross state domestic product (GSDP) in 2019-20 is estimated at ~93 trillion, which is over 45 per cent of India’s gross domestic product.
Yet, no proper analysis of these Budgets has been undertaken in the national media. There are only some routine reports of key announcements made when the finance ministers of those states presented them before the respective legislative assemblies. However, PRS Legislative Research has undertaken a commendable exercise by putting together the key financial numbers contained in these state Budgets in a uniform format, making it easy for analysts to study them.
What do these nine state Budgets show? Worryingly, the robustness and integrity of the state Budget numbers seem to be as lax as the trend recently witnessed in the case of the Union Budget. This is most evident in the variations in the revised estimates for the states’ 2019-20 Budgets, compared to the estimates that were first presented a year ago. The difference between the Budget Estimates (BE) and the Revised Estimates (RE) has been widening by a significant margin for the Union Budget in the last couple of years. If the nine state Budgets presented so far this year are any indication, the disease has afflicted even the states.
For instance, the expenditure in 2019-20 for all the nine states varied significantly in the RE, compared to what was put out in the BE. Uttar Pradesh saw its expenditure in RE decline by 5.8 per cent over the BE number. Rajasthan, Punjab, Odisha, and Haryana followed a similar trend, reporting a decline in their expenditure according to RE by 3.5 per cent, 4.3 per cent, 2.9 per cent and 2.1 per cent, respectively.
Significantly, the states that saw their expenditure according to RE exceed what was given in BE for 2019-20 are all set for Assembly elections in the next one year or so. Bihar, where Assembly polls are due later in 2020, saw its expenditure exceed by 8.6 per cent over the BE number. West Bengal and Tamil Nadu will go for Assembly elections in early 2021 and their expenditure under RE exceeded BE by 4.3 per cent and 2.2 per cent, respectively. The exception was Kerala, which too is set to go for polls in 2021, but its RE expenditure shrunk by over 11 per cent.
Two other trends are noticeable in the nine state Budgets that have been presented so far. Every state experienced a reduction in its receipts (which comprise mainly their tax revenues and the transfers from the Centre) under RE, compared to BE. This could be largely attributable to poor collections of state goods and services tax (SGST), but projecting revenues at levels well above what is feasible can play havoc with Budget discipline and casts doubts over the states’ ability to fulfil their expenditure commitment.
For Bihar, the decline in receipts under RE, compared to BE, was as huge as 14.3 per cent, followed by Kerala (14 per cent), Uttar Pradesh (5.4 per cent), Haryana (5.2 per cent), Punjab (4.4 per cent), Rajasthan (4.3 per cent), Odisha (2.8 per cent) and Tamil Nadu (2.7 per cent). West Bengal was relatively good with its receipts under RE remaining lower by just 0.6 per cent than the BE number.
In spite of such poor performance by most states in meeting their revenue targets, the state Budgets for 2020-21 are quite ambitious in projecting double-digit growth in receipts next year. Bihar has projected a 21.5 per cent increase in receipts in 2020-21, followed by Kerala at 15.6 per cent, Tamil Nadu at 13.9 per cent, Uttar Pradesh at 13 per cent, Odisha and Punjab at 11 per cent each, and West Bengal at 10 per cent. Punjab and Rajasthan, however, buck this trend. Receipts for next year are projected to decline 2.2 per cent for Punjab and grow by just 0.2 per cent for Rajasthan.
The second disturbing trend is the growing burden of debt servicing for many states, which has stayed well above the level of 3 per cent GSDP. Debt servicing (which is repaying debt with interest) has reached a high level of 10.8 per cent of GSDP for Punjab, 7.13 per cent for Kerala, 6.28 per cent for West Bengal, 4.48 per cent for Haryana, 4.29 per cent for Rajasthan, and 3.55 per cent for Uttar Pradesh. The state that has kept the share of debt servicing in GSDP under control is Tamil Nadu at 2.67 per cent. The Centre’s interest payment liability in 2019-20 was about 3 per cent of GDP.
It is possible that the Budgets to be presented by the remaining 22 governments (comprising those of states and Union Territories) in the coming weeks may present a slightly different picture. But the trends already seen in the Budgets of nine states can hardly be ignored. In short, more attention needs to be focused on state Budgets.