New Delhi: In the first part of this series, we talked about how state budgets mirror the social and economic priorities of the state government, transcending political rhetoric.
Amid this, one must realise that the government expenditure at the state level is a critical parameter that demands vigilant tracking and stringent control. The allocation and utilisation of financial resources directly impact the well-being and development trajectory of a region.
It is imperative to monitor state-level expenditures to ensure that public funds are judiciously channelled into areas that genuinely contribute to societal growth, such as education, healthcare, and infrastructure. Rigorous thoughtfulness is essential to prevent wasteful spending, financial mismanagement, and corruption, thereby safeguarding the interests of the citizens.
Holding state governments accountable for their expenditures fosters transparency and efficiency, promoting responsible governance. It also becomes a key tool in preventing the lure of populist measures that may yield short-term political gains but jeopardise the fiscal health of the state in the long run.
Examining expenditure composition in states, the study by Ravi and Kapoor highlights that in larger states like Kerala, Punjab, Maharashtra, Karnataka, and Gujarat, per capita expenditure typically surpasses the national average. Conversely, in states such as West Bengal, Bihar, and a few others, it notably lags behind the national level.
Expenditure is categorised into two groups: development and non-development. Development expenditure primarily focuses on social and economic services related to rural and urban development and infrastructure. The study notes that the share of development expenditure exceeds 50 per cent for most large states, except Punjab and Kerala, where it falls below this threshold. West Bengal and Uttar Pradesh have experienced a decline in the share of development expenditure from 1990 to 2020.
The predominant component of non-development expenditures in Indian states is interest payments. Analysing data for all states and Union Territories, the proportion of interest payments and debt servicing experienced an ascent from 1990–91 to the mid-2000s, followed by a decline by 2020–21. Over the past 30 years, there has been a notable transformation in non-development expenditures. Initially, interest payments and debt servicing increased, but subsequently decreased, while the share allocated to pensions witnessed a significant rise. High-growth states allocate a smaller percentage to non-development spending, underscoring their emphasis on fostering economic growth.
Examining the financial aspect of state economies, particularly the capital outlay for development, a crucial factor in long-term economic growth and enhanced productivity, Ravi and Kapoor note a trend in per-capita total capital outlay. From 475 in 1990–91, it increased to 511 in 1999–00, surged to 1553 in 2008-09, declined to 1332 in 2010-11, and then rose to 1926 in 2020-21. Notably, Punjab and West Bengal, experiencing below-average real per-capita growth, allocate minimal investment to capital outlay for development. This pattern may be attributed to substantial capital disbursement toward internal debt, leaving limited room for development-oriented capital outlay, potentially contributing to the growth lag in these states.
Amidst an ageing population and extended life expectancy, government employees’ pensions have evolved into a significant political battleground. The Indian government’s pension reforms in 2003–04, driven by political resolve and foresight, aimed to ensure the sustainability of state budgets.
Post these reforms, a clear structural shift is evident. The real beneficiaries of these reforms were the poor and vulnerable, including women and children, whose access to state resources would have otherwise been overshadowed by the privileged and well-connected few. The analysis underscores the imperative for state governments, beyond the financial feasibility of the OPS, to carefully consider its impact on the marginalised, especially women and children. This should emerge as a pivotal mandate for the upcoming Finance Commission – assessing the long-term economic viability (financial welfare) of public pension programs in India.
In states like Himachal Pradesh and Punjab, pensions already constitute a staggering 37 per cent and 31 per cent of development spending, ranking among the highest nationally. Reverting to the old pension scheme in these states would undoubtedly wreak havoc on their impoverished populations, depriving them of crucial services such as health and education. Moreover, this reversal hinders their participation in growth opportunities, redirecting resources from the essential infrastructure needs of the poor to the excessive consumption of the privileged few.
The dilemma of whether the state should prioritise providing essential consumption goods or focus on economic goods fostering productivity is undeniably intricate and multi-faceted.
First and foremost, there is an undeniable imperative for the state to furnish a basic minimum of food, health, education, and security to preserve individual dignity. While the definition of this basic minimum is practically contingent on the state’s economic capacity and, to some extent, the social and political context, it remains a non-negotiable obligation.
Second, any state provisions exceeding this basic minimum risk induce three distortions: (a) fostering over-dependence, thereby diminishing individual efforts, (b) elevating the likelihood of corruption and rent-seeking activities by state functionaries due to increased dependency, and (c) diverting resources away from essential, long-term productivity-enhancing expenditure like infrastructure.
The third consideration demands a departure from mere rhetoric to scrutinise states’ actual resource allocation on developmental activities, evaluating the tradeoff they face between development and non-development expenditure, including pensions, interest rates & debt servicing, and administrative services. In asserting fiscal prudence, it is imperative to prioritise investments that yield sustained economic growth and enhance the overall welfare of the populace.
Despite the moral expectations states impose on their citizens, the financial management in many states lacks a solid foundation built on governance and moral values. There’s a dire need for states to exercise stricter control over their mounting debt and curb the politically motivated distribution of freebies.
However, it raises the alarming question: Are politicians leveraging long-term finances to secure short-term electoral victories, conveniently leaving the ensuing chaos for future leaders to rectify? This tactic is as morally bankrupt as it gets, reflecting a blatant disregard for responsible governance and the well-being of the state and its citizens.
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