The state of state budgets
With states expected to push the reforms agenda, a mechanism is needed for assessing their budget data
Several states have by now presented their annual budgets for 2024-25. Unsurprisingly, many of them have made rosy projections and tall promises. Only time will tell if these announcements result in actual performance on the ground, either by fulfilling the promises made or through effective implementation of the policies outlined.
But going beyond the question of implementation, these budgets serve another purpose. They bring to light the actual and revised numbers that underlie those budgets presented in the last three years. The objective of this article is to use these budgets to assess how these states have done in the post-covid period from 2021-22 to 2023-24, for which reliable numbers are now available. And perhaps compare that assessment with the trends seen in the Centre’s budgets in the same years.
For obvious reasons, the numbers under study are actuals for the first two years (2021-22 and 2022-23) and revised estimates for the current financial year. A quick look at these budget numbers for about 20 large states (excluding Andhra Pradesh and Odisha, which are going into their respective Assembly elections in the coming weeks) offers many takeaways for those tracking India’s public finance.
On the question of these states’ intent on fiscal consolidation, the picture is mixed. Quite a few states have failed to fulfil their fiscal deficit targets they had set for themselves at the time of presenting their budgets. In 202324, for instance, as many as seven states have produced a revised estimate of their fiscal deficit that is wider than what they had projected in the budget estimate. Assam, Bihar, Chhattisgarh, Himachal Pradesh, Tamil Nadu, Maharashtra and Rajasthan are guilty of not adhering to their own target, while Karnataka and Uttar Pradesh have barely managed to stay close to the number they had indicated.
Clearly, there is no pattern in this performance. If you thought the problem lies with eastern, northeastern and hilly states, then what explains the poor performance of large states like Tamil Nadu, Maharashtra and Rajasthan? Equally puzzling is the none-too-encouraging performance of Karnataka and Uttar Pradesh, which have otherwise run their public finances quite efficiently.
The list of states that have reduced their fiscal deficit from what they had promised in their budget estimates is even more interesting. These are: Delhi, Gujarat, Haryana, Punjab, Uttarakhand, West Bengal, Tripura, Telangana, Goa, Jharkhand and Kerala. The only explanation here seems to be that relatively small states have managed better fiscal consolidation than their larger counterparts. The exceptions here are the states of Gujarat and West Bengal.
How has fiscal consolidation been for the states during the post-covid years? Among the 20 states that have presented the Budget for 2024-25, as many as 13 states have run up a fiscal deficit in 2023-24, which is higher than what prevailed in 2021-22. These are Assam, Bihar, Chhattisgarh, Gujarat, Himachal Pradesh, Uttar Pradesh, Uttarakhand, Tamil Nadu, Goa, Jharkhand, Maharashtra, Rajasthan and Tripura. It is remarkable that some of the stronger states today have a fiscal deficit that is more than what they ran in 2021-22.
The states that have done well on this front are Delhi, Haryana, Karnataka, Punjab, West Bengal, Kerala and Telangana. They can rub shoulders with the Union government, which has not only bettered its fiscal deficit performance in each of these years, but has also effected an almost one percentage point decline in fiscal deficit during this period. However, the fact that many states, which are large and whose finances are run efficiently, could not bring their deficit down in this period is a cause for concern.
On capital expenditure, the Centre has succeeded in raising it from a level equivalent to 2.5 per cent of gross domestic product (GDP) in 2021-22 to 3.2 per cent in 2023-24. Something similar, and indeed better, has happened with the states. At the aggregate level, these 20 states have raised their capex as a percentage of their gross state domestic product (GSDP) from a lower level of 2.09 per cent to 3.36 per cent in the same period.
The surprise, however, comes from the states that led the charge in raising capex. These are Goa, Uttar Pradesh, Jharkhand and Rajasthan, all of which have more than doubled their capital outlays as a percentage of GSDP. While states like Assam, Uttarakhand, Bihar, Chhattisgarh, Gujarat, Maharashtra and Tripura have also raised their capex, though by lower margins, the states that have seen a worrying decline or only a marginal increase are Delhi, Himachal Pradesh, Karnataka, Punjab, Tamil Nadu, Kerala, Telangana, West Bengal and Haryana. The laggards in this area need to be closely studied to find out what went wrong in the overall push towards more infrastructure, an initiative that had been set in motion by the Centre, particularly after Covid.
The broad trajectory of growth in tax collections and revenue expenditure has been similar for both the Centre and these 20 states. The share of revenue spending by the Centre has stayed at 12-13 per cent of GDP, just as these 20 states also saw their revenue expenditure at about 13-13.5 per cent of GSDP.
The difference is with respect to tax revenue collections. The Centre has managed to keep its net tax collections at around 7-8 per cent of GDP in this period (not much different from the pre-covid years), while these states have kept their own tax revenues at around 6.5-7 per cent of GSDP. But where the states have gained is from tax transfers from the Centre, which amounted to an additional 3-3.5 per cent of GSDP. If some states could not stay within their fiscal deficit targets even after such transfers, there is a need for bringing them under closer scrutiny.
This brings us to the larger question of why there is relatively less discussion and debate about the financial performance of state governments, compared to the sharp focus on the Centre’s management of its finances. And this happens even though the total size of the states’ budgets is now almost 18 per cent larger than that of the Centre’s budget.
The absence of analysis of state finances, in sharp contrast to the general obsession with the Centre’s budgets, is largely attributable to the relative lack of data on state budgets. Not only are the state budget data not easily available, but they are also presented in different formats by different state governments, making the task of comparison and analysis a little more onerous. The Reserve Bank of India does come out with an annual compendium of state budgets, but this comes after a lag of a few months.
At a time when the Centre is focusing more on the states, expecting them to shoulder the task of the next generation of economic reforms, it will be a good idea to create an institutional mechanism for periodic compilation and publication of state budget data in a format that makes their numbers comparable with those available for the Centre’s budgets. India needs greater deliberation and debate over state finances. The first step towards facilitating that would be a better system for collecting and publishing state budget data.