Poll-bound states spend heavily this year amid ambitious Budget projections

But their Budget numbers are inclined to be overstated due to substantial revisions in revenues and grants shared by the Centre

States have generously expanded their Budget sizes and have projected a massive growth in expenditure this year, shows a Business Standard analysis of seven territorial Budgets presented to date. 

They project 13 per cent growth in revenue expenditure, or current spending items such as salaries, pensions, interest payments, followed by health and education sector schemes and other welfare areas. But when it comes to productive spending such as that on roads and infrastructure, they have gone a step ahead to put on paper 42 per cent growth in capex. 

When the economy is set to contract 3.8 per cent in nominal terms this year, most states have projected a growth in their gross state domestic product, with the average set to grow 5.5 per cent this year. 

Interestingly, poll-bound states have projected a higher growth in revenue spending this year, but expect a lower economic growth than those states which are not going to polls this year. 

And finally, salaries and pensions are yet again set to eat into states’ coffers by commanding a massive 35 per cent of their total spending, and as high as 42 per cent of their revenue expenditure. 

At least eight large states have presented their Budgets for financial year 2021-22 till the end of February. Four have presented a vote-on-account as they were going to polls—Kerala, Assam, West Bengal and Tamil Nadu—and elections have been announced subsequently in those states. The other four—Uttar Pradesh, Rajasthan, Odisha and Bihar—have presented full Budgets. 

States going to polls have not uploaded all documents on their respective websites, and so Assam has been left out of the current analysis. 

Growth in economy 

Only three of seven states have projected a contraction in nominal gross state domestic product (GSDP) for the pandemic-hit year 2020-21. Put together, their nominal GSDP is set to grow 5.5 per cent this year, according to the Budget documents they have presented. 

Rajasthan is projecting the biggest fall, at minus 4.1 per cent. On the other hand, Uttar Pradesh chief minister Yogi Adityanath has projected that its GSDP will grow 15.5 per cent even after the impact of the pandemic. 

For comparison, India’s economy is likely to contract 3.8 per cent this year in nominal terms. Real GDP estimates were not released in the Budgets. 

Most states expect their economies to rebound in 2021-22, with the laggard Rajasthan predicting the biggest jump of 25 per cent growth in FY22. Kerala has projected a mellow forecast of 6.6 per cent growth in nominal GSDP in FY22. 

On average, the seven states have projected a 13 per cent growth in their nominal GSDP in the upcoming year. 

Interestingly, poll-bound states have projected a smaller nominal growth in their GSDP this year (3.8 per cent), than the non-poll bound states (7.3 per cent).

Expenditure

The central government raised expenditure compared to the Budget estimate to providing a boost to the economy. States too have projected growth in total spending in 2020-21, compared to the previous year, despite a fall or stagnation in revenues. 

For the seven states under consideration, total expenditure is projected to be growing at 17 per cent this year, followed by 14.7 per cent in FY22. While revenue spending will grow close to 13 per cent each year, states have budgeted strong capex growth of 42 per cent this year, followed by 25 per cent in the next. 

This unprecedented, and seemingly unachievable growth may have been possible due to an overestimation in revenues. Economists at Icra have noted that revenues from the head “Grants from the Centre” are overestimated by a wide margin each year. 

Take for instance, the case of Bihar. It has projected the Grants to grow from Rs 27,000 crore in FY20 to Rs 53,000 this year, and to Rs 54,500 crore in FY22. It has also projected a 50 per cent growth in revenues from “Share in Centre’s tax revenue” this year, when in fact the Centre has projected a fall in states’ share in tax revenues. 

Bihar finance minister Tarkishore Prasad has budgeted for 60 per cent growth in total expenditure. Most of this will come in the form of capital expenditure, documents show. Bihar’s capex is projected to triple in FY21, from close to Rs 12,500 crore in FY20 to about Rs 38,000 crore this year. But Prasad has accounted for a fall in capex in the coming year. 

These accounting mismatches will most certainly keep the actual expenditure levels lower than presented in the Budgets. 

Poll-bound states project high revenue spending

Barring Bihar, three non-poll bound states have been modest in their revenue spending estimates for this year. Odisha expects its revenue spending to grow 5.8 per cent this year, Rajasthan and UP have planned for 7-8 per cent rise in current spending. 

Poll-bound Kerala, Tamil Nadu and West Bengal have projected revenue spending to grow 12 per cent, 17.2 per cent and 10.3 per cent, respectively, this year.

As for productive spending, Tamil Nadu has projected doubling of capital expenditure this year, followed by a contraction in FY22, once again prompting that state Budget numbers have to be taken with a pinch of salt. 

To account for rising spending, all states have expanded their fiscal deficits in FY21 revised estimates, compared to the previous year, with the average going above 4 per cent of GSDP.  

Bihar and Rajasthan are set to cross the 6 per cent GSDP level this year, if the actual numbers hold true to revised estimates. Big spenders UP and Tamil Nadu have kept it at 4.2 per cent and 5 per cent of GSDP, respectively. 

But even in FY22, states have kept deficits at higher levels touching the 4 per cent level, recommended by the 15th Finance Commission. 

Borrowing of these seven states are expected to rise 40 per cent this year—to account for revenue shortfalls—and is projected to be 5 per cent lower than this year in FY22.