States Spending on Education, Health Saw Higher Growth: RBI
Mumbai: State governments that spent money on sectors such as education and health benefited from higher economic growth, RBI has found.
However, many of their businesses are loss making, adding to their financial woes, and RBI suggests that governments sell off state enterprises by offering stock options to employees, among others, to bring their finances back on track, according to the report ‘State Finances: A Study of Budgets of 2015-16’. States that spent a higher share of their income on social sectors have benefitted over a longer period, while gains out of pay revisions have been short term in nature.
“Larger investment in education and health is a prerequisite for harnessing the benefits of an increasing young work force for gainful and productive allocation of human capital,” the report said.
RBI underscored the need for lower-income states to increase social sector spending. “Expendi- ture on the social sector is associated with large positive externalities,” it said. “States in lowerincome brackets need to improve social sector spending …These adjustments would enhance labour productivity and enable states to reap the benefits of the ‘demographic dividend’.”
The report lauds the fiscal consolidation efforts of states — the gross fiscal deficit of states dipped from 4% of their GDP in 200001 to an estimated 2.4% in 2015-16. However, it voiced concern that besides salary expenditure, growing pension liabilities could be another major source of fiscal strain for states in the future, while underscoring the need to focus on the quality of fiscal expenditure. From a medium-term perspective, enduring improvements in the quality of states’ finances would hinge on the revival of state-level public enterprises and improving the viability of power distribution firms.
RBI suggests that govts should sell off state enterprises to bring finances back on track