Economy
State welfare spending purses get fatter in pre-election year
Summary
Welfare spending was a big campaign point in the latest state elections. State budgets for 2023-24 indicate that will be the case in the run-up to the 2024 national election as well
A key plank of recent election campaigns has been welfare spending. Incumbents touted their achievements in this area, and challengers promised to extend the welfare state further if elected. This theme is likely to be repeated in the run-up to the Lok Sabha election in 2024 (expected in April-May), with states partly buoyed by improved revenue collections.
An overview of state budgets for 2023-24, released by the Reserve Bank of India earlier this month, shows that total social sector spending by states is projected to increase 9.2% to ₹24 trillion.
While the increase may not seem too high, especially in a pre-election year, it comes on the back of a 28% increase in 2022-23, when states had found themselves flush with funds following a recovery in economic activity after covid-19 lockdowns eased.
However, the 9.2% overall increase in social sector spending conceals wide variations across states. Fourteen states have budgeted for greater increases, led by Jharkhand, Tamil Nadu, Andhra Pradesh and Telangana in the 19-22% range. Elsewhere, prominent states below the all-India average include Punjab, West Bengal, Rajasthan, Gujarat and Maharashtra. Further down that spectrum, six states have budgeted a decline in social sector expenditure, including Bihar and Assam.
Social sector expenditure here includes education, health, rural development, development schemes targeting specific social groups (such as scheduled castes and tribes), and urban development.
Across states, for 2023-24, education, sports, and art and culture account for around 31% of total social service expenditure. Heath, social security and welfare, and rural development, account for another 10-11% each, and urban development for 7.2%.
Rising self-reliance
States have budgeted an overall 8.2% increase in their “own tax revenues" in 2023-24, up from 7% a year earlier. RBI says strong growth in the state component of the goods and services tax (state GST) has been “instrumental" in reducing the overall funding dependence of states on the Union government. Yet, 42% of state revenues are still from the Centre, either in the form of taxes raised by the Centre but shared with states under constitutional rules, or central grants to states for specific uses or schemes.
States differ widely in the extent to which they are reliant on their own tax revenues to finance their spending. For richer states such as Maharashtra, Haryana and Gujarat, their own tax revenues account for more than 80% of their overall tax revenues. At the other extreme, there’s Bihar, which doesn’t even cross 30%. For mineral-endowed, but poor, states like Jharkhand, Odisha and Chhattisgarh, this is around 50%.
Spending shifts
On the spending side, while the share of several components of social sector spending has remained more or less constant, there have been significant shifts in certain components. The grouping “education, sports, art and culture" remains the largest component, but its share in social sector spending has dropped by 10 percentage points since 2005-06 to around 32%. Conversely, spending on social security, which is increasingly taking the form of putting more money in the hands of people via cash transfers, has increased by 6 percentage points.
Reflecting the increasing urbanisation of different states, spending on urban development now accounts for 7% of total social sector spending, up 4 percentage points over the last 18 years. Meanwhile, spending on rural development has remained more or less constant at around 11%. Spending on natural calamities, mainly in the form of relief to affected families, dropped by 3 percentage points over that same period.
Persistent inequalities
Despite greater social sector outlays, inequalities across states persist. As countries develop, disparities in development across regions should decline, according to mainstream economic theory, a phenomenon known as ‘convergence’. One way this plays out is richer states draw migrants from poorer ones, who then remit earnings back home. Richer states also contribute more to central taxes, which are then transferred to poorer states and used for developmental expenditure there, thus reducing inequalities.
However, disparities in per capita income persist, and have grown over the last decade, as the Centre’s Economic Survey noted a few years ago. Richer states also have the advantage of being more self-sufficient in revenues, and are thus less dependent on central funds. But as they step up social sector spending, especially of a nature that involves cash transfers rather than creating future assets, their finances will need to keep pace.
www.howindialives.com is a database and search engine for public data
