State budgets are spending more, putting in more money for development

Centre's expenditure on non-development categories like salaries, pensions payments has increased

In the early years of economics and, specifically, budgets, the dominant idea was fiscal conservatism. Budgets had to be balanced, and states could ill-afford to be profligate. The Great Depression changed that belief, with economist John Maynard Keynes arguing for deficit spending. Countries have since then adopted a middle path, expanding the government but within parameters for fiscal responsibility.

India follows a similar approach, with the Fiscal Responsibility and Budget Management Act, passed in 2003, fixing deficit levels.

This approach has not led to fiscal contraction. The central government’s size, or its expenditure, has expanded faster than some economies, but it hasn’t kept pace with the increase in the gross domestic product (GDP) or the value of goods and services produced in the country.

Despite a higher growth rate of budget expansion, the Indian government’s size relative to the GDP remains low. In 2022-23, the ratio is expected to be 14.4 per cent, whereas it would be 25.1 per cent for the United States and 21.7 per cent for China.

If one considers India’s state governments, the situation changes. State budgets, once lower than the centre's, are now higher as a proportion of their own GDP.

A 'Business Standard' analysis found that states’ expenditure will be 18.5 per cent of their GSDP (Gross State Domestic Product) in 2022-23, compared with 14.4 per cent spent by the centre.

States' spending may only increase. In eight of the last 11 years, the annual growth of their budgets has been higher than the centre’s.

States' quality of expenditure is better than the centre's. Of the total spending by states in 2022-23, at least 68 per cent is expected to be for development expenditure. The corresponding ratio for the central budget would be less than 50 per cent.

While states’ spending on development items has grown, the centre’s expenditure on non-development categories like salaries, pensions, and interest payments has increased.

The centre has some catching up to do, if not in terms of size, then in the quality of spending.