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 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.
The spending priorities of the Union and the States are guided by the constitutionally allocated powers and functions for them
Reserve Bank of India (RBI) has categorised the budgetary expenditures by the Union and the State governments as ‘developmental’ and ‘non-developmental’.
The former includes expenditures on social services and economic services (such as on agriculture and industry) while the latter 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.
As a proportion of the country’s Gross Domestic Product (GDP), the combined developmental expenditures by all State governments increased from 8.8% in 2004-05 to 12.5% in 2021-22.
On the other hand, the social and developmental expenditures by the Union government remained somewhat unchanged over the two-decade period.
Kerala Scenario
Kerala provides an excellent illustration of the power of government spending to positively transform a region’s economy and society.
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.
A sizeable chunk of the government expenditure on social services is in the revenue account, paid as salaries and for covering day-to-day expenses.
In fact, the large body of teachers, nurses, and other government employees in Kerala — half of them women — have been a key driver of the State’s social achievements over the decades.
At the same time, the pensions paid to retired government employees as well as to members of the disadvantaged sections (such as the elderly, agricultural workers, widows) make up 16.4% of all budgeted expenditures by the Kerala government.
This is markedly higher than the average proportion allotted for pensions by all Indian States (9.7%).
It is indeed a concern that only 10.6% of Kerala’s budgetary resources was directed to capital expenditure (in 2022-23), which is much needed to build new infrastructure and institutions to speed up future growth
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; and market borrowings.
For Kerala to translate its enormous advantage in the social sphere to advances in domestic income creation, there need be more government spending
Especially so on higher education and research that will help build a facilitative environment for a knowledge-driven economy.
Given the current state of federal fiscal relations, such an increase in government spending can occur only with greater market borrowings.
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