How precarious are state finances?

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Published: April 24, 2020 2:40 AM

India has to sustain growth momentum ahead, public investment will have to fill up an even larger deficit in private spending than it does now.

Whichever be the mandated agency, the government should now originate similar publication of monthly state accounts on their websites too.

The corona crisis has brought the country’s fiscal health into focus as never before. The sudden escalation in expenditure demands is starkly opposed to the paucity of public savings, or shall we say, the large magnitude of dissavings. It is now common knowledge that even the stingy income relief of central government is ill-affordable, and that state governments too have limited or no spare resources. Both have run out of money; neither has any fiscal space to spend for this crisis.

Although the Centre’s precarious finances, on and off-budget, were well known due to the keen macroeconomic scrutiny these attract each month, the states’ actual fiscal position is not—only the budgeted revenue-expenditure profile is. It is time that state government finances, too, are subjected to similar concurrent examination as the Centre’s are. For this crisis has made clear that going forward, the country cannot afford not to have fiscal space in the future. Therefore, monthly updates of state government accounts ought to be published as the Controller General of Accounts (CGA) does for the central government.

Extending the public scanner so will enable more holistic consideration of the evolving deployment of public revenues or spending patterns against what is budgeted. Presently, the only knowledge of state government finances is obtained from their annual budgets. Therefore, any shortfalls or overshoots in revenue-expenditures through the year, and under different heads, are known only at the year-end, or when the next year’s budgets are presented. Real-time evolution of states’ spending and revenues are not known because this data is not published. This precludes contemporary evaluation of state accounts for a very long interval.

Because of this omission, for example, our extant knowledge about financial conditions of the states when the corona crisis erupted was simply that this was relatively better and improving. According to RBI’s annual State Finances: A Study of Budgets (September 2019), states’ aggregate fiscal deficit was budgeted at 2.6% of GDP for FY20, down from 2.9% the previous year; its analysis identified a strong consolidation trend over 2014-19.

As to what, and how, the actual revenue-expenditures outturns against budgeted amounts through FY20 were is impossible to determine for lack of contemporary, primary data. All we know is that health being a constitutionally-determined state subject, the epidemic’s major financial burden towards medical and economic relief expenditures has descended on the states, for which they have little or no bandwidth.

We know they are running short of money, but only from reported comments/interviews of individual chief and/or finance ministers, their repeated demands for timely and faster devolution of shareable taxes, and from their pleas for revising current fiscal rules to enable higher borrowing-spending limits. We also know of the states’ financial desperation from their recent agreement to borrow from the market at sky-high yields, after which their WMA limits were increased. However, no one knows how financially fragile, less-weak, or robust each is.

By contrast, the Centre’s evolving fiscal position is concurrently known as the CGA publishes disaggregated revenue-expenditure data each month. Thus, it is possible to keep tabs on, say, different revenue run-rates, or distribution of capital and current spending by government. Not only do these provide lead indications about the real economy, they are also early signals of potential adjustments or switches. Such current focus, which is excessively oriented towards central government spending, now needs to extend to the states as well.

While the precise financial architecture for corresponding monthly updates of states’ accounts is not clear, i.e., the agency with mandate to compile and release this information, it is known the national statistical agency (CSO) obtains state government expenditure maintained by the Comptroller and Auditor General of India (CAG) to estimate quarterly GDP. Whichever be the mandated agency, the government should now originate similar publication of monthly state accounts on their websites too.

Another reason for monthly updates of state accounts is for a contemporaneous dissection of resource allocations and spending choice across states. The corona crisis has uncovered the disastrously negative fallout of ever-increasing shares of current expenditures in total spending, the overbearing pre-occupation with populist freebies, and consequent neglect of essential investments such as health, spending on which has steadily declined. This is visible in the bare, inadequate health and medical infrastructure across states. The burden of this insufficient spending, in addition to the lack of fiscal room to ease the pain of a deliberately-induced recession, has fallen squarely upon all, but disproportionately more upon those whose earnings are most vulnerable to a stringent lockdown.

Starting with food, subsidies have extended on increasing scale across the Centre and states—to electricity, homes, cooking gas connections and cylinders, and so on, including cash handouts—in a competitive, populist race-to-the-bottom. Such overbearing current expenditures are clearly unaffordable in the future. There cannot be a repeat of such dire financial straits, which has to be safeguarded against to be better prepared for exigencies. Fiscal spaces have to be created at all levels of government.

The states figure prominently in this regard for two reasons. One, the world as whole is likely to see a structural shift in public expenditure policies, making public health more central than before. This means higher investments in strengthening and extending health infrastructures, higher engagement of medical personnel, etc, even as it is acknowledged that no country can be fully prepared for an epidemic of this pace and scale. State governments will have to carve out the necessary spaces as they are at the forefront of health expenditure. If Kerala stands out in its epidemic management because of its strong public health capacities and well-functioning systems, other state governments can follow suit. From the standpoint of public investments and welfare, allocation choices are better off competing here than in free-this and free-that to win elections.

Two, if India has to sustain growth momentum ahead, public investment will have to fill up an even larger deficit in private spending than it does now. About two-thirds of total public capex is estimated to be contributed by states, making them more integral drivers of the country’s growth. An up-to-date monitoring and evaluation of states’ spending and revenue efforts is necessary from this standpoint too, especially as the productive capex is cut when revenues fall short while unwise or self-motivated spending is retained. Generation of debate, and peer comparisons are required in a democracy for oversight on how taxes and resources from public divestments and asset sales are spent.

Finally, questions on creation of fiscal capacities will soon surface as general government balances are reappraised, consolidation roadmaps revised—the additional crisis-expenditures will enlarge deficits at all levels of government, public debt stock will also rise. Further leverage build-up will have to be reduced in the medium-term. Public expenditure and its relative efficiency across the Centre and states will be re-examined from a macroeconomic stability perspective. All the more reason for responsible spending and revenue efforts by states too, for timely evaluation of India’s debt dynamics, in which growth is the key variable; anticipating spending adjustments, e.g., capex cuts for larger current spending, will allow a better handle upon the real economy than what we have at present.

India faces this crisis with empty coffers. No one want such a financial situation to repeat in the future, when economic growth too may be at a premium. Leaner public balance sheets in future must also be of better quality. We hope the government accepts this suggestion and provide monthly state accounts updates for everyone’s knowledge.

New Delhi based macroeconomist. Views are personal

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