Source: Should State Governments borrow more? (The Hindu, April 4)
The Kerala government is in a dispute with the Union government over how much the State can borrow to cover its expenses exceeding its income. The Union government suggests limiting borrowing to 3% of the State’s income or Gross State Domestic Product (GSDP). Kerala argues this limit hampers its financial autonomy and violates federalism principles.
State Spending Dominance
- Overview: While the Union government has tax-raising authority, State governments handle most spending, especially in crucial sectors like health and education.
- Social Services Spending: In 2022-23, the Union government spent ₹2,230 billion on social services, while all State governments combined spent ₹19,182 billion. This indicates a significant disparity, with States spending 8.6 times more on social services, 2.6 times more on education, and 3.8 times more on health.
- Comparative Expenditures: The Union government allocates more funds to defense and combined spending on transport, urban development, and energy compared to social services.
Rise in State Developmental Expenditures
- Trend: Over the past two decades, State governments have notably increased developmental expenditures, particularly in social services and economic sectors like agriculture and industry.
- State vs. Union Spending: While State developmental spending has risen from 8.8% to 12.5% of GDP from 2004-05 to 2021-22, the Union’s spending in these areas has remained relatively stable.
- Impact: State spending has played a crucial role in mitigating livelihood crises, especially during periods of slow rural income and employment growth.
Kerala’s Spending Patterns
- Historical Perspective: Kerala’s government spending on education, health, and social sectors has consistently been high, ranging between 40% to 50% of total expenditures from the 1960s to the 1990s.
- Stagnation in Spending: While other states saw an increase in social sector spending from the mid-2000s, Kerala’s proportion remained stagnant.
- Local Self-Governments (LSGs): A significant portion (6% in 2022-23) of Kerala’s budget is allocated to LSGs, potentially increasing the state’s social sector spending compared to the national average.
- Key Drivers of Social Achievements: Government employees, particularly teachers and nurses, have played a crucial role in Kerala’s social progress, with a significant portion of expenditures allocated to salaries and day-to-day expenses.
- Pension Expenditure: Kerala allocates a higher proportion (16.4%) of its budget to pensions compared to the national average (9.7%), addressing the needs of retired government employees and disadvantaged sections.
- Concerns on Capital Expenditure: Only 10.6% of Kerala’s budget is directed towards capital expenditure, hindering the development of infrastructure necessary for future growth.
Funding Sources and Borrowing
- Sources of Funds: State governments receive funds from own revenues, Union government transfers, and market borrowings.
- Increased Spending Amid Pandemic: In response to the COVID-19 pandemic, Kerala significantly increased spending to 18% of its GSDP in 2020-21, aided by relaxed borrowing norms.
- Decreased Union Transfers: Union transfers to Kerala declined to 2.8% of GSDP in 2023-24, while state revenues remained around 8.0%, leading to increased borrowing.
- Legal Challenge: Kerala’s plea for additional borrowing has been referred to a Constitution Bench by the Supreme Court, as it seeks to overcome borrowing limits set by the Centre.
Advocating Increased Government Spending
- Economic Transformation: Kerala’s strong social foundation can be leveraged for economic growth, but this requires more, not less, government spending.
- Focus on Higher Education and Research: Investing in higher education and research can foster a knowledge-driven economy, essential for sustainable growth.
- Need for Greater Market Borrowings: Given current fiscal relations, increasing government spending necessitates higher market borrowings.
- Utilizing Domestic Savings: Kerala possesses significant private savings that could be channeled into productive uses, supplementing government borrowing.
- Addressing Concerns on Debt: Concerns about debt-financed expenditures are overstated. Borrowing, if deployed effectively, can stimulate economic growth and job creation, as per Keynesian economics.
- Collaborative Approach: The Union and State governments should collaborate to tackle common challenges, such as an ageing population and youth outmigration.
- Long-Term Planning: Kerala must demonstrate that its borrowing is part of a comprehensive economic revitalization strategy, rather than a short-term fix for financial needs.