STATE GOVERNMENT BORROWINGS

2. State vs. Union Government Spending in India

• In India, the authority to levy taxes predominantly lies with the Union government, while State governments undertake a significant portion of overall government expenditure.
• Crucially, State governments bear the primary responsibility for sectors directly impacting citizens' daily lives.
• Illustrating this, the expenditure on social services, encompassing health and education, in the fiscal year 2022-23 was ₹2,230 billion by the Union government, whereas all State governments collectively spent ₹19,182 billion.
• This discrepancy highlights the overwhelming role of State governments, with their combined expenditure exceeding that of the Union by 8.6 times in social services overall, 2.6 times in education, and 3.8 times in health.
• Both Union and State governments align their spending priorities with constitutionally allocated powers and functions. Notably, the Union government's spending on defence surpasses that on social services by approximately two-fold, while its combined spending on transport, urban development, and energy is 2.4 times higher.
• The Reserve Bank of India (RBI) categorizes government expenditures into 'developmental' and 'non-developmental' segments.
• Developmental expenditures encompass social services and economic sectors such as agriculture and industry, while non-developmental expenditures include items like interest payments, pensions, and subsidies.
• Significantly, over the past two decades, developmental expenditures—particularly on social services by State governments have witnessed a substantial increase.
• The combined developmental expenditures by all State governments as a proportion of the country's Gross Domestic Product (GDP) surged from 8.8% in 2004-05 to 12.5% in 2021-22.
• In contrast, the social and developmental expenditures by the Union government remained relatively stable over the same period.
• The upswing in State government spending, especially during the 2008-12 period and a brief revival post-2020, has played a pivotal role in mitigating the country's livelihood crisis.
• This crisis stemmed from the sluggish growth of rural incomes and employment, underlining the crucial impact of State-level initiatives on the nation's socio-economic landscape.

3. Kerala's Pioneering Approach to Government Spending

• Kerala stands out as a compelling example of how government expenditure can catalyze positive economic and social transformations within a region.
• Remarkably, from the 1960s through the late 1990s, the allocation towards education, health, and other social sectors by the Kerala State government consistently accounted for 40% to 50% of its total budgeted expenditures.
• This commitment to social sector spending far exceeded the average of other Indian states until the mid-2000s.
• However, while the average proportion for other states began to climb from the mid-2000s, Kerala's allocation stagnated.
• Despite this, a noteworthy portion of Kerala's budget, amounting to 6% in 2022-23, is now decentralized to Local Self-Governments (LSGs), potentially keeping the state's social sector spending above the national average when factoring in LSG expenditures.

Key Role of Government Employees

• A significant portion of government spending on social services in Kerala is directed towards the revenue account, covering salaries and day-to-day expenses.
• The substantial workforce of teachers, nurses, and other government employees half of whom are women has been instrumental in driving the state's social advancements over the years.

Pension Expenditure Concerns

• Pension payments to retired government employees and disadvantaged groups, such as the elderly, agricultural workers, and widows, constitute 16.4% of all budgeted expenditures by the Kerala government, surpassing the national average of 9.7%.
• However, there is a notable concern regarding the allocation of only 10.6% of Kerala's budgetary resources to capital expenditure in 2022-23, which is crucial for building new infrastructure and institutions to stimulate future growth.

Funding Sources and Borrowing Challenges

• State governments like Kerala receive funds from three primary sources: own revenues (tax and non-tax), transfers from the Union government, and market borrowings.
• In response to the COVID-19 pandemic in 2020-21, Kerala significantly increased its spending to 18% of its Gross State Domestic Product (GSDP), supported by relaxed borrowing norms.
• However, in subsequent years, Union government transfers to Kerala declined, reaching 2.8% of GSDP in 2023-24, while the state's own revenues remained around 8.0%.
• This led to a scenario where Kerala had to raise borrowing to 3.4% of GSDP in 2023-24 to meet its modest budget expenditure, breaching the borrowing limit set by the Centre.

The Supreme Court has intervened by referring Kerala's plea for additional borrowing to a Constitution Bench, recognizing the pressing need to address the state's borrowing constraints and ensure its fiscal stability.

4. Advocating for Increased Government Spending

• To leverage Kerala's significant strides in social development for further economic advancement, there's a compelling case for increased government spending, particularly in areas like higher education and research.
• Such investments are crucial for fostering a conducive environment for a knowledge-driven economy.
• Given the current dynamics of federal fiscal relations, expanding government spending can only be achieved through increased market borrowings. This approach is essential to propel Kerala's economic trajectory forward.
• Much of Kerala's government borrowing, akin to other regions in India, stems from domestic financial institutions such as public sector banks and insurance companies, which pool savings from the wider public.
• Kerala boasts a substantial reserve of private savings, suggesting potential avenues for channelling these resources into productive ventures. Concerns surrounding debt-financed government expenditures are often overstated.
• Drawing from Keynesian economic principles, government borrowing can trigger a virtuous cycle if effectively deployed to generate new incomes and employment opportunities.
• Many of the developmental challenges confronting Kerala today, including an ageing population, significant pension outlays, and youth outmigration, are issues that other states will likely encounter in the future.
• Collaborative efforts between Union and State governments are imperative to address these challenges collectively.
• Kerala must articulate a comprehensive plan demonstrating that its borrowing is not merely a short-term measure to address immediate financial constraints but rather a strategic initiative aimed at revitalizing the economy.
• By emphasizing long-term economic rebuilding, Kerala can garner support and ensure that its borrowing initiatives contribute meaningfully to sustainable growth and development.