The State Budget

India Mar 27, 2021

The major 11 states of the country account for a little over 60% of the GDP of the nation. As the states have presented their budgets for the economical year of 2021-22, the spotlight has also been around how they have done during the pandemic. Several trends have been observed in the budget presented by the states this year.

Firstly, states are showing qualm for borrowing money to spend more. A total of 6% decline in expenditure is expected due to this. If this is seen in the budgets of the rest of the states as well, the overall estimated expenditure will be lower than that predicted before the onset of the pandemic.

As expected, the states that usually run revenue surpluses will run revenue deficits this year. As a consequence, capital spending by states, which was budgeted to be around 50 per cent more than that of the Centre in 2020-21, has been cut sharply. Moreover, borrowings have been halted and pensions have been cut back. Allocation salaries also have been gashed. 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.

Oddly, some of these states did have the freedom to ramp up spending by borrowing more as the government has raised the GSDP (Gross State Domestic Product) by 3 to 5 percent on market borrowings. Part of this increase is unconditional while the rest is for centre-mandate fiscal reforms. However, the states haven’t taken up this 2% rise into consideration.

All the states have planned for aggressive fiscal amelioration this 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.

States have planned on achieving these reforms by revenue enhancements as opposed to the centre which is sticking to expenditure compression.

Certain states have pegged their VAT and GST collections to grow up to an ambitious 30% for this financial year. This clearly isn’t the first time there are such huge ambitions with regards to the budgets. This has been seen across several budgets.

This article has been written by Ritu Katkar for The Paradigm

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