The total expenditure of all the states this fiscal will be 65% more than the Centre’s and half of the rise in spending will come from states’ own revenue.
The total expenditure of all the states this fiscal will be 65% more than the Centre’s and half of the rise in spending will come from states’ own revenue. Tax collection has improved because of value-added tax and state governments now have a lot more freedom on how they can spend the money.
Higher spending by states on services like police, education urban administration, utilities and public works boost state GDP. According to a Credit Suisse report, states with more government employees have higher per capita GDP.
States that have a bigger police force tend to have higher GDP as basic services like law and order are critical for greater investments. For instance, against the national average of 1.38 police per thousand population, Bihar has 0.55 and lags on GSDP per capita too. Employment in education and police, the two largest categories of state workers, is rising and poorer states are also spending more on rural development.
As states employ 57% of all those employed by government as a whole, they spend about 25% of their budgets on salaries and only 15% of their spending on capex. Implementation of the 7th Pay Commission could see a hike in wages by around Rs 2 lakh crore and even pension outgo would rise. Though this would boost the consumer durable business, these could stress state fiscal deficit. So, additional tax mop-up will be critical.