States' spending on salaries, pensions and interest payments going down

Capex on social sector rises; differences in GST accounting make trends on the revenue front unclear

In public discourse, the Centre’s Budgets typically get more attention than those of the states. But collectively, the states spend much more than the Centre. 

Their spending plays a key role in shaping the country’s development story. A recent comprehensive study by economists at the National Institute of Public Finance and Policy (NIPFP), led by Pinaki Chakraborty, sheds light on how states’ expenditures and revenues have fared over the past few years.

Four broad trends emerge

On the expenditure side, state governments have been able to bring down the share of their ‘committed expenditure’ on wages, salaries, pensions and interest payments. This has created greater fiscal space, allowing them to spend more on social welfare and infrastructure development. Under the broad rubric of capital expenditure, spending on social services such as urban development, water supply and sanitation have seen the sharpest increase over the past few years.

On the revenue side, the study shows tax devolution from the Centre to states has been clearly progressive. On a per capita basis, states with lower incomes have received greater devolution.

The NIPFP study also looked at how states’ have fared in collecting revenues on their own. This would have been valuable particularly to understand the impact of goods and service tax on state revenues. But since the states have not used a uniform framework to account for revenue from different components of the  GST, this has rendered comparisons of pre and post GST periods difficult. This confusion over how GST is accounted for by states gains significance as these numbers would form the basis for the 15th Finance Commission’s deliberations. 

Committed expenditure

Over the past decade or so, states have been successful in keeping their ‘committed expenditures’ under check.

For example, the share of pensions in revenue expenditure has declined from 11.66 per cent of their revenue expenditure in 2010-11 to 11.04 per cent in the 2018-19 budget estimates (BE). Similarly, the share of interest payments on state debt in revenue expenditure has gone down from 13.41 per cent to 11.33 per cent over the same period.

Data from the RBI’s study on state finances shows that states have also managed to keep the growth of expenditure on wages and salaries under check. States’ wage bill for FY19 is expected to grow at 14.3 per cent in FY19, down from 19.8 per cent in FY18.

States have been able to keep a tight control on this count by staggering the payout of the pay commission award over a couple of years. The NIPFP study shows the share of wages and salaries in total revenue expenditure has declined to 19.1 per cent in FY17 from 24.19 per cent in FY11.  

Capital spending rises

A significant shift in composition of general government’s (Centre plus states) capital spending took place in the first half of the decade when the states’ capital spending began to exceed that of the Centre. For 2018-19, at the aggregate level, total state capex has been pegged at Rs 5.7 trillion. In comparison, the Centre’s capex is budgeted at Rs 3 trillion. The study probed the nature of this capital expenditure by the states.

Much of the increase in capex by states over the past few years has been geared more towards social services rather than economic services. Social services refer to expenditure on subjects like health and education, whereas economic services are expenditure on road, transport and power.

The NIPFP study estimates spending on social services increased from 0.54 per cent of gross domestic product in FY16 to 0.76 per cent in FY19. Much of this is being spent on water supply and sanitation, education, medical and public health, urban development and housing. 

Of the Rs 1.4 trillion budgeted to be spent on social services in FY19, roughly a fourth or Rs 356 billion is committed towards water supply and sanitation, while another 18 per cent is allocated for urban development.

In comparison to a healthy growth in spend on social services, spending on economic services rose from 1.88 per cent of GDP to only 1.96 per cent over the same period. A closer look at the data also shows that, put together, transport and irrigation account for roughly 60 per cent of the capital expenditure on economic services. The efficacy of this expenditure is another story that was out of the ambit of the NIPFP study.

The revenue pie

The authors of the study have also looked at how states’ own revenues have fared over time. But here they hit a roadblock.

Going plainly by the numbers states have reported, their own tax revenues fell from a high of 6.97 per cent of the GSDP in 2012-13 to 6.36 per cent in 2018-19 (BE).

The transition to GST in 2017-18 makes a simple understanding of these numbers difficult. One, the states have not used a uniform framework to report different components of the GST for 2017-18. Additionally, one needs to account for the compensation states secure from the Centre for a decline in their own revenues after implementation of GST.

For example, some states have shown revenue from IGST as own tax revenue, while others have shown it as part of devolution. 

For instance, states such as Andhra Pradesh, Chhattisgarh, Maharashtra, Tamil Nadu and Telangana have shown IGST revenues as their own tax revenue.

Similarly, only a handful of states have shown revenues from the GST compensation cess separately. It is possible that states like Maharashtra, Punjab, Chhattisgarh and Uttarakhand, which have not shown revenues from compensation cess separately, may have to include it as part of devolution.

If one were to include the compensation paid by the Centre to states on account of revenue loss under GST, then states’ own tax revenue works out to 6.67 per cent in FY19 instead of 6.36 per cent. 

On the other hand, a clear picture does emerge of how tax devolution from the Centre to the states has trended. The study shows states’ share in the central tax pool has been progressive in nature — poorer states (on a per capita basis) get a larger share of the pool than richer ones.