RBI released the latest edition of the ‘States Finances: A Study of Budgets’ report. As per the data presented in this report, while the revenue expenditure on wages & salaries, and operations & maintenance as a share of GSDP has decreased over the years, the expenditure on subsidy has increased on account of COVID-19.
Like in the case of the Union government, State governments also incur various types of expenditure. The expenditure is in the form of both revenue and capital expenditure. Revenue expenditure is more like operational expenditure and is recurring in nature while capital expenditure is more on time for building assets. Few of the major heads under revenue expenditure incurred by states include – interest payments, wages & salaries, pensions, subsidies, etc. Based on the revenue of the state & its spending priorities, the expenditure of states on various items changes from state to state.
In this story, we look at the trends in revenue expenditure of the states for a few of the key heads – salaries & wages, operations & maintenance, subsidies, etc. The data provided in the Reserve Bank of India’s (RBI) “States Finances: A Study of Budgets” report is used for the purpose of analysis. The analysis of the trends is made as a ratio of the specific expenditure type and GSDP (Gross of State Domestic Product) of the respective state. The GSDP numbers used in the story are from the data provided in RBI’s Handbook of Statistics of Indian States. GSDP at current prices with the base year as 2011-12 is considered.
Expenditure as a share of GSDP on Wages & Salaries: Increased in certain states while it decreased in others
The trends in expenditure as a share of GSDP on wages & salaries have varied over the 10-year period from 2011-12 to 2020-21. Data is not available for certain years & certain states. Further, the expenditure on wages & salaries for 2020-21 is revised estimates and not actuals.
Here is what the data has to say for a few of the states.
- As per the revised estimates for 2020-21, a total of Rs. 48.72 thousand crores were spent by Andhra Pradesh on wages & salaries. This amounts to around 4.94% of its total GSDP which was Rs. 9.86 lakh crores. The trend for the 10-year period (2011-12 to 2020-21) indicates that the expenditure on wages & salaries as a share of GSDP has been on a decline in Andhra Pradesh. In 2011-12, it was around 7.07% which has consistently decreased over the years. The major decline was in 2014-15 when the state was bifurcated into two. However, this share has been increasing over the last two years. In terms of absolute value, the spending has increased from Rs. 28.8 thousand crores in 2011-12 to Rs. 48.72 thousand crores (revised estimates) in 2020-21. The decline in proportion is also due to the higher growth of GSDP, which increased from Rs. 3.79 lakh crores in 2011-12 to Rs. 9.86 lakh crores in 2020-21.
- Another state which reported a significant fall in expenditure on wages & salaries as a proportion of GSDP is West Bengal. In 2011-12, the total expenditure on wages & salaries was Rs. 26.9 thousand crores, which increased to Rs. 41.5 thousand crores in 2018-19, the latest year for which the data is available. The share of this expenditure in GSDP fell from 5.18% to 3.77% between 2011-12 and 2018-19. This is again due to the higher proportionate increase in GSDP compared to the expenditure on wages & salaries during this period.
- Among the large states, Assam has a higher wages & salaries to GSDP ratio. In 2011-12, it was 8.14% which remained more or less constant at 8.06% in 2019-20. During this period, the expenditure on wages & salaries as a share of GSDP breached the 9% mark in 2017-18 and decreased subsequently.
- Chhattisgarh & Rajasthan have reported an increase in expenditure on wages & salaries as a proportion of GSDP. In the case of Chhattisgarh, expenditure on wages & salaries was 4.71% of the GSDP in 2011-12 which increased to 6.98% in 2020-21. In the case of Rajasthan, this increased from 3.65% to 5.61% during the same period. Both the states have witnessed a higher increase in the amount being spent on wages & salaries, compared to the increase in the state GSDP. Even in Karnataka, the same increasing trend is observed though to a lesser extent.
- The proportion of spending on wages & Salaries for most of the other states has largely remained the same. The increase in the expenditure was matched by the corresponding increase in the GSDP of these states.
- In terms of absolute value, Maharashtra has a significantly higher expenditure on wages & salaries than other states. Since its GSDP is also significantly higher, the expenditure on wages & salaries as a share of GSDP is around 3.5%.
Jharkhand has a significant fall in the proportion of expenditure towards Operations & Maintenance (O&M)
Compared to expenditure incurred on wages & salaries by any State government, the expenditure incurred on Operations & Maintenance (O&M) is lower. Analysis of expenditure incurred on O&M shows that barring a few states, the proportion of this expenditure compared to GSDP has largely remained the same. The expenditure increased at par with the increase in GSDP without any additional burden. Here is what the numbers say.
- Jharkhand has significantly reduced its expenditure on O&M, over the years. In 2011-12, Rs. 10.1 thousand crores were spent, which was reduced to Rs. 6.7 thousand crores in 2020-21(revised estimates). This contributed towards a fall in the proportion of this expenditure in relation to GSDP from 6.74% in 2011-12 to 2.11% in 2020-21.
- Andhra Pradesh has also reduced the proportion of its expenditure on O&M. While the amount increased to Rs. 13.2 thousand crores in 2019-20 (the latest year for which actuals are available) from Rs. 8.4 thousand crores in 2011-12. The expenditure on O&M as a share of GSDP fell from 2.23% in 2011-12 to 1.36% as per revised estimates for 2020-21.
- Data indicates a significant fall in the O&M expenditure of Assam as well. In 2011-12, it was Rs. 4.2 thousand crores. As per the latest information available for the state as of 2018-19, this expenditure is only Rs. 639 crores. The reasons for this drastic fall are not known.
- Meanwhile, the O&M expenditure in Bihar has witnessed an increase. As per revised estimates for 2020-21, a total of Rs. 11.34 thousand crores expenditure would be incurred on O&M, which is around 1.8% of GSDP. In 2011-12, it was 1%.
- The revised estimates for most of the states indicate an increase in the proportion of O&M expenditure in 2020-21 compared to 2019-20.
Increase in Subsidy expenditure during 2020-21 across most of the states.
A new statement is included in RBI’s 2020 report of “State finances: A study of Budgets report” that provides additional information on subsidies by the state governments since 2018-19. The type of subsidies included in this expenditure is not specifically mentioned, but a review of the report indicates that all expenditures incurred by the states in the form of extending subsidies – to industries, farmers, food, etc. are included.
As per the data provided in the RBI report, most of the states have witnessed an increase in the subsidy expenditure in 2020-21, as per the revised estimates. The increase in 2020-21 could be due to the support extended by the respective state government in view of the COVID-19 pandemic. The subsidies extended during the pandemic were in the form of food, sustenance expenditure, subsidies to industries (especially MSMEs), etc.
- The data available for the three years i.e., 2018-19 to 2020-21, indicates a significant increase in the subsidy expenditure for Chhattisgarh. In 2018-19, the expenditure was Rs. 8.3 thousand crores, which increased the next year to Rs. 20.3 thousand crores. As a proportion of GSDP, it increased from 2.62% in 2018-19 to 5.89% in 2019-20.
During the pandemic year of 2020-21, the revised estimates point to a further increase to Rs. 26.13 thousand crores i.e., 7.46% of GSDP.
- Among the large states, Chhattisgarh has the highest proportion of expenditure on subsidies in relation to its GSDP. As of 2020-21, it ranks only next to Maharashtra in terms of the total value of expenditure on subsidy.
- Except for Andhra Pradesh, Karnataka, Jharkhand & Rajasthan, the proportion of expenditure on subsidy in relation to GSDP has increased for the rest of the major states as per revised estimates for 2020-21. While there is a fall in the expenditure on subsidies during 2020-21 for Andhra Pradesh, it is set to increase to Rs. 14.28 thousand crores in 2021-22 compared to only Rs. 4.94 thousand crores in 2020-21.
- Kerala’s GSDP figures aren’t available for 2020-21. Hence, the proportion of expenditure on subsidy cannot be calculated. However, in terms of absolute value, expenditure on subsidy has significantly increased in 2020-21 to Rs. 4.12 thousand crores compared to Rs. 1.37 thousand crores in 2019-20.
- Telangana has also increased its expenditure on subsidies from Rs. 6.83 thousand crores in 2019-20 to Rs.10.55 thousand crores during the pandemic year of 2020-21.
Revenue expenditure as a share of GSDP reduced except for Subsidies
Among the three types of revenue expenditure by state governments that have been analysed in the story, it is observed that for most of the states, the expenditure incurred on wages & salaries and operations & maintenance has reduced as a proportion of GSDP. While there are variances over the years for many of the states without a clear trend of increase or decline, there is an overall decline in the expenditure on these two items as a share of state GSDP. Though the expenditure has increased in absolute terms, the higher growth of GSDP meant that the proportion of expenditure has actually reduced.
However, subsidies present a different picture with the onset of the COVID-19 pandemic. With the onset of the COVID-19 pandemic in February 2020, the subsidy expenditure increased significantly for most states. If states whose data for all the three years (2018-19 to 2020-21) is available are considered, then the subsidy expenditure increased by 8.48% in 2019-20 and by 12.48% in 2020-21.
Featured Image: State Governments’ expenditure on Subsidies