Divergent trends in revenues and expenditure: Gokarn

Content from the Brookings Institution India Center is now archived. After seven years of an impactful partnership, as of September 11, 2020, Brookings India is now the Centre for Social and Economic Progress, an independent public policy institution based in India.

A Business Standard article quoted Brookings India Director of Research and former RBI deputy governor Subir Gokarn on the trends in revenues and expenditure.

‘On the revenue side there appears a shift towards greater centralisation, with the likely implementation of the GST’

The outlook for revenues and expenditure may reflect divergent trends in the federal structure of the country, said Subir Gokarn, director of research at the Brookings Institution India Center.

The 14th Finance Commission (FFC), which has raised the share of states in government’s tax revenue to 42 per cent from 32 per cent, represents a fundamental break in the way the federal structure will evolve in the coming years, he said at the launch of Brickwork Rating’s State Finances Handbook.

He argued that on the revenue side there appears a shift towards greater centralisation, with the likely implementation of the Goods and Services Tax (GST). But on the expenditure side, the government has moved in the opposite direction, towards greater decentralisation. These divergent forces are likely to impact the direction of state finances.

Currently, states own tax and non-tax revenue contributed between 48 per cent and 51 per cent of total receipts, respectively, during 2009-2015, according to Brickwork Ratings state finances handbook. Sales tax accounted for about 60 per cent of states own tax revenues, followed by state excise duties at 27 per cent, and motor vehicle taxes at 10 per cent. States such as Jharkhand, Kerala, Gujarat, Haryana, and Andhra Pradesh have been able to mobilise greater resources through sales tax increases. But these figures are likely to change with the implementation of the GST, especially if alcohol and tobacco are included in the GST.

On the expenditure front, state expenditure is largely directed towards sectors such as education, health and family welfare, agriculture and irrigation, rural development, and employment generation. Broadly speaking, these sectors can be divided into three categories – social services, economic services, and general services. On average, states spend 43 per cent towards social services, 22 per cent towards economic services, and 35 per cent towards general services.

But a good portion of rising revenue expenditure of states over the past years is on account of a rise in salary and pension and interest liabilities (general services). This reduces funds available to the states to spend on social and economic services.

As the recommendations of the 14th finance commission have been accepted, the share of untied funding will increase to 42 per cent. The question is whether the increase in untied funds will be spent on social and economic services or on general services?

The problem is also one of capacity and capability. As Gokarn pointed out, marked variation exists across states in terms of capacity and capability to implement projects and provide services. It is possible that many states simply do not have the capacity to spend the extra resources transferred to them from the Centre.

As efficiency levels vary across states, the increase in resources may simply be spent inefficiently.

Concerns over social sector programmes: World Bank

The World Bank says the changes recommended by the 14th Finance Commission have raised concerns about the reduced spending from the Centre on social sector programmes and the ability and willingness of the states to finance key social sector programmes under these schemes.

In its India Development Update, the bank said concerns were also there about state willingness to continue with the current programme design under schemes, with changed funding programme.

The Centre will have fiscal responsibility for financing and implementing plan centrally sponsored schemes (CSS) that are national priority or constitutional obligation. Specifically, while CSS fully financed by the central government are projected to grow 12 per cent between 2014-15 to 2015-16, CSS with shared financing would decline by 21 per cent. In overall terms, the Centre would be saving Rs 27,100 crore in the current financial year by restructuring CSSV

Read the full article in the Business Standard.