HOW MUCH CAN STATES BORROW?
The
financial relation between the
Union and various State governments has been a matter of vigorous debate.
In a recent development, the
Government of Kerala has approached the Supreme Court for a resolution of the following question:
how much can the State government borrow from the market to bridge the excess of its expenditures over receipts?
The Union government says that the
borrowing should be limited to 3% of the State’s income or
Gross State Domestic Product (GSDP). Kerala contends that by curtailing its borrowing powers, the Centre is undermining the State’s ability to fulfil some of its basic financial commitments and violating the principle of federalism.
SOURCES OF INCOMES FOR THE STATES
State governments receive funds from
three sources:
- Own revenues (tax and non-tax)
- Transfers from the Union government as shares of taxes and as grants
- Market borrowings.
DO STATES SPEND MORE?
It is well known that in India
the power to raise taxes rests largely with the Union government while a greater part of the overall government spending is done by the State governments.
More importantly,
when it comes to spending on sectors which
affect people’s daily lives, the
overwhelming responsibility lies on the shoulders of the State governments.
THE STATISTICS
On social services, which include
health and education, the expenditure incurred in 2022-23 was
?2,230 billion (1 billion = ?100 crore) by the Union government while the
combined expenditure by all State governments was ?19,182 billion.
The
expenditures of all the States put together was bigger than the expenditure of the Union by 8.6 times in social services as a whole; 2.6 times in education; and by 3.8 times in health.
DEVELOPMENTAL & NON DEVELOPMENTAL EXPENDITURES
The Reserve Bank of India (RBI) has categorised the
budgetary expenditures by the Union and the State governments as
‘developmental’ and
‘non-developmental’.
WHAT IS DEVELOPMENTAL EXPENDITURES?
It includes expenditures on social services and economic services (such as on agriculture and industry)
WHAT IS NON DEVELOPMENTAL EXPENDITURES?
It refers to interest payments, pensions, subsidies, and so on.
It is remarkable that developmental expenditures, and within that, the expenditures on social services incurred by the State governments have risen significantly over the last two decades. (8.8% of GDP in 2004-05 to 12.5% of GDP in 2021-22.)
KERALA’S CASE
The
expenditure on education, health and other social sectors as a
proportion of the total budgeted expenditures by the State government in Kerala ranged between
40% and 50% for four decades, from the
1960s until the end of the 1990s. The proportion of
social sector spending in Kerala was
way ahead of the
corresponding average of all other States until the
middle of the 2000s.
From the mid-2000s, while the average proportion of
all other States rose upward, the
proportion for Kerala stagnated. A substantial part of Kerala’s budget (
6% in 2022-23) is now devolved to
Local Self-Governments (LSGs).
If the spending by the LSGs on social sectors is taken into account, the proportion for Kerala could still be higher than the average of all other Indian States
- In 2020-21, the Kerala government had sharply increased its spending to 18% of its GSDP, to provide economic relief in the wake of the COVID-19 pandemic, aided by the relaxation in borrowing norms then.
- As ratios of GSDP, the Union government’s transfers to Kerala declined to 2.8% in 2023-24, significantly lower than previous years, even as the State’s own revenues remained at around 8.0%.
- This meant that, in 2023-24, the State government could meet its modest budget expenditure, equivalent to 14.2% of GSDP, only by raising the borrowing to 4% of the GSDP — which, however, would cross the borrowing limit set by the Centre.
The Supreme Court has now referred Kerala’s plea for additional borrowing to a Constitution Bench.
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