Financial Health of States
The fiscal health of States has rebounded
from pandemic-induced stress, aided by buoyant
revenue collections and prudent expenditure
management. The undershooting of budgetary
targets for key deficit indicators has enabled
States to reduce their outstanding liabilities.
These developments have extended into 2022-23 so far. A coincident indicator of this sustained improvement is that market borrowings are much lower than in the indicative calendar due to comfortable cash flow positions of the States, boosted by timely payment of GST compensation by the Centre (May and November 2022) and release of two advance installments of tax devolution (August and November 2022). The States need to take advantage of this ‘sweet spot’ by building up fiscal buffers and stepping up capex.
The recognition of off-budget borrowings
of States in their debt positions and within annual
borrowing ceilings is a welcome step towards
achieving transparency. A major risk looming large on the subnational fiscal horizon is the likely reversion to the
old pension scheme by some States. The annual
saving in fiscal resources that this move entails is
short-lived. By postponing the current expenses
to the future, States risk the accumulation of
unfunded pension liabilities in the coming years.
These developments have extended into 2022-23 so far. A coincident indicator of this sustained improvement is that market borrowings are much lower than in the indicative calendar due to comfortable cash flow positions of the States, boosted by timely payment of GST compensation by the Centre (May and November 2022) and release of two advance installments of tax devolution (August and November 2022). The States need to take advantage of this ‘sweet spot’ by building up fiscal buffers and stepping up capex.
Going forward, increased allocations
of capital expenditure for sectors like health,
education, infrastructure and green energy
transition can help expand productive capacities
and create a broad-based developmental agenda
for the States. Outlays on social services and
physical infrastructure can enhance productivity;
hence, States must mainstream capital planning
rather than treating them as residuals and first
stops for cutbacks in order to meet budgetary
targets. In this context, it is worthwhile to consider
creating a capex buffer fund during good times
when revenue flows are strong so as to smoothen
and maintain expenditure quality and flows
through the economic cycle.
States also need to step up their
expenditure on research and development (R&D)
from the current lows compared to global peers1
so as to spur innovation and progress. Climate change is another area that
deserves special attention in the coming years.
There is a growing recognition of the need for
responsible climate change policies at the Statelevel in areas such as clean energy, energy
efficiency, clean transport, and sustainable
land use, among others. Capacity building on
access to finance and climate governance would
help States meet their potential and realise the
committed national target of net zero emissions
by 2070. In this regard, climate-incentivised
borrowing ceilings may encourage States to issue
green bonds in order to finance green projects.
Also, within the Scheme for Special Assistance
to States for Capital Investment, a separate head
44
1 As per the latest data available from World Bank (World Development Indicator Database) till 2020, most of the OECD countries spend
more than 2 per cent of their GDP on R&D. Among the BRICS countries, expenditure on R&D amounts to 1.2 per cent of GDP in Brazil; 2.4
per cent in China; 1.1 per cent in Russia; and 0.6 per cent in South Africa as against 0.7 per cent in India. Among others, Israel and South
Korea spend 5.4 per cent and 4.8 per cent of GDP, respectively, on R&D.
The Way Forward
45
for climate-related investment projects can be
created.
The COVID-19 pandemic, geopolitical
events and global spillovers from synchronised
aggressive monetary policy tightening have
stalled the progress on Sustainable Development
Goals (SDGs). India has in fact, slipped (Sachs
et al., 2022). Going ahead, India’s commitment
to achieve the SDG goals by 2030 is heavily
conditioned by policies and actions adopted
by the States. With the Centre’s recent thrust
towards ‘SDG Localisation’2
, States are now better
equipped to orient their spending and investment
patterns towards areas requiring attention. Capital
expenditure by States in critical areas, viz., health,
education, infrastructure, R&D and green energy
transition holds the key to India achieving the
SDGs. As a part of institutional reforms, State
governments need to set up Finance Commissions
(SFC) in a regular and timely manner to decide on
the assignment of taxes, fees and other revenues
to local governments. Institutionalisation of a welldefined and timely devolution mechanism to local
governments can improve the provision of quality
services for the greater public good.
Over the years, considerable progress has
been made in terms of creation of infrastructure,
both physical and social, through several
government initiatives. In particular, the postpandemic economic recovery in India has been
supported by enhanced public capex by both
the Central and State governments. As a result,
fiscal stimulus by design emphasized sustainable
and non-inflationary normalization of economic
activity. Since capital expenditure by sub-national
governments in India is more than two thirds
of the total capital expenditure incurred by the
general government, it is imperative for all the
States to continue with the current capex push,
to sustain the quality of expenditure and maintain
capital assets so that their longevity improves.
In addition, States should also step up capex in
areas like research and development and green
energy. States can also realize the full benefit
of positive spillover effects by facilitating higher
inter-state trade and businesses. Going ahead,
all tiers of government must engage along with
private participation to create world-class capital
assets in India.
Source-RBI Report
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