Till about 10 years ago, the size of the budget of the central government was more than the combined expenditure of all the states.
This scenario changed in 2012-13. In that year, the budget of the states increased to Rs 14.55 lakh crore, which for the first time exceeded the budget of Rs 14.1 lakh crore of the central government.
Since then, the share of states in the total expenditure of the government has been increasing continuously and by 2019-20 it had reached 55 per cent.
Due to the covid pandemic, there was a huge increase in the budget of the central government and this equation changed but only for one year.
While states’ expenditure in 2020-21 was estimated at Rs 34 lakh crore, just a tad lower than the Centre’s Rs 35 lakh crore, the states regained the lead the following year.
Their share in total government expenditure has increased to 51 per cent and is projected to increase to 53 to 55 per cent in 2022-23.
The consolidated budget of the states is more than the budget of the Center so that it can be told that how important the 31 states and union territories of the country are to the fiscal situation of the country.
At this time when the discussion is going on in the country about the budget to be presented by the Center for 2023-24, it would be useful to know what will be its impact on the economy of the states and in comparison to the center in terms of fiscal consolidation in the post-covid period.
How have the states performed? Overall, the states account for more than half of the country’s total government expenditure.
On the fiscal front, the states have done better than the Centre. In 2019-20, the pre-covid year, the fiscal deficit of the Center was 4.6 per cent of the gross domestic product (GDP) while that of the states was 2.6 per cent.
That is, the total government deficit was equal to 7.2 percent of GDP. This increased to 13.3 per cent in 2020-21 in which the share of the Center increased to 9.2 per cent while the share of the states was 4.1 per cent.
The total government deficit came down to 9.5 per cent in 2021-22, of which the Center’s share was 6.7 per cent and the states’ 2.8 per cent.
Obviously, the states brought down their deficit rapidly and brought it within the target of 3 per cent. This helped bring down total government expenditure to single digits.
It is estimated that the states will be able to keep their deficit below 3 per cent in 2022-23 as well, while the central government will have to struggle hard to stay within the range of 6.4 per cent.
According to government data, the fiscal deficit of states in April-November 2022 was only 35 per cent of the budget deficit target of 3.4 per cent for the entire year.
In comparison, the Centre’s fiscal deficit in the first eight months of 2022-23 was 59 per cent of the full-year budget target.
According to some estimates, the deficit of the states in the current year could be between 2.3 to 2.5 per cent of GDP as the state goods and services tax ie SGST collection has improved.
Apart from this, the share of the states in the central GST collection has increased and the center has increased the transfer to the states from the total tax collection.
In the period April to November 2022, this amount increased by 37 percent to Rs 5.5 lakh crore.
Apart from this, the reduction in the expenditure of the state governments also contributed to this. Especially the reduction in capital account expenditure.
The improved revenue collection of the states is undoubtedly a positive development but the reduction in expenditure may affect the economy.
Traditionally, expenditure by states on their various capital expenditure programs picks up pace in the last quarter of the financial year.
Analysts expect states to increase expenditure on these projects, but even then the deficit may remain below 3 per cent.
If the states can keep the deficit below 3 per cent for the second consecutive year, it will have other benefits.
First, the states will borrow less from the market, the bond market will be relatively stable and the Center will also be comfortable in planning borrowings.
Second, reining in the deficit by the states would help the Center manage the overall government deficit level.
The GST system has also benefited from the better revenue collection of the states. The system of paying compensation to the states has come to an end earlier this year.
Initially, there were apprehensions that it would become a point of contention between the states and the Centre.
But most of the states with high revenue collection are doing well without compensation.
Barring 10 states, all other states and union territories have shown GST collections of more than 14 per cent in 2022-23.
The GST Compensation Cess may remain in force till March 2026 to repay the debt taken by the central government for funding the states, and rationalizing the GST rates and removing this instrument would be an attractive policy option.
Talking about debt and outstanding liabilities, that area remains a matter of concern for the states.
The consolidated debt level of states to come down to 28.7 per cent of GDP at the end of March 2022.
A year ago it was 31.1 per cent. But in March 2023, it is estimated to increase again to 29.5 percent.
If this is to be included in the outstanding guarantees of states equivalent to four per cent of GDP, then the sustainability of the debt appears to be a matter of concern.
So the deficit will have to be contained for a few more years before states can claim to have moved towards fiscal stability.