A Surge in State Spending

The recent report of the Reserve Bank of India on state finances shows a significant hike in their budgetary spending. This is a major gain as state budgets have a significant impact on social sector spending and the overall development of the economy. Another reason that the fiscal policies of the states are very critical is that the aggregate spending in the state budgets is generally larger than that in the union budget. Though the pandemic forced the union government to initially increase its budgetary expenditure above the budgetary spending of the states, the state budgets have regained their pre-eminent role since then.

The budget estimates show that the aggregate spending of the states in 2022–23 will be `47.6 lakh crore. This is around one-fifth higher than the targeted union budget expenditure of `39.4 lakh crore for the year. Medium term trends show that the aggregate spending in the state budgets, which hovered around 16% of the gross domestic product (GDP) before the pandemic, had shot up by 1 percentage point to 17.2% of the GDP in 2020–21 and then steadily accelerated to 18.5% of the GDP in the budget estimates for 2022–23. An increase in state budget outlays by more than 2 percentage points of GDP in three years, is something unprecedented in the recent decades and will help bolster the incipient recovery.