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September 28, 2018

Indian Economy: States of spending

High and rising inequality, large gaps in health and education outcomes, and theneed to create rural infrastructure imply the government’s role in the economy hasbecome more prominent, particularly in areas the private sector has shied of. At thesame time, given the limited resources at its disposal, the government must ensureits spending is in appropriate areas, effective, and efficient.


States are playing an increasingly important role in India’s investment spending,accounting for 65% of the overall government spending, with larger shares in socialsectors and capital formation. It is observed that the central government’s capitalspending through its budget is coming down and the public investments in theeconomy are increasingly becoming dependent on state governments and theinternal and extra budgetary resources of the public-sector entities.


During fiscals 2016-2018, of the 18 non-special category states, five states – UttarPradesh, Bihar, Karnataka, Telangana and Maharashtra – accounted for almosthalf the capex done by the states. Interestingly, of these, Uttar Pradesh, Bihar andTelangana, had the highest proportion of capex in the state spending.


But what about spending priorities of the states in other critical areas such ashealth, education, irrigation, housing, social security, urban and ruraldevelopment? States like Uttar Pradesh, Punjab, Madhya Pradesh and Bihar arenot directing their funds to areas they lag in, whereas Chhattisgarh, Gujarat,Haryana and Telangana have fared better in prioritizing their spending.


In nearly all major states, most of the spending is concentrated on education: ~15%of total spend on average at an all-state level. Some states like Andhra Pradesh,Bihar and Chhattisgarh are spending much more (~19% of their total spending).This ties well with requirements since these states rank low on education. Butstates like Kerala, Karnataka and Haryana, which rank relatively high on educationlevels, are also spending over 15% on education. Thus, they need to shift focus toother sectors. These state economies might in fact benefit more if funds areoriented towards other areas such as irrigation or roads.


A common feature observed across states is the lack of adequate attention on keyareas such as health, irrigation and housing. Housing attracts merely 1% of statespending on average, while 2% is spent on urban development and 4-5% on therest.