The Centralisation of Public Expenditure

The Ministry of Finance released the Indian Public Finance Statistics 2012-13 earlier today on their website. Drafted by a team under the direction of the Chief Economic Advisor to the Finmin (currently the RBI Governor Raghuram Rajan), the statistics are of very high value as they are a collation of union and state government expenditures and revenues from the past several years.

When we hear the union budget every March, we get only a partial picture of what is planned for India in the coming year, as states play a significant role in allocating public resources.

Today I take a quick look at the decentralisation of public expenditure in India, between the union government and the states. Local bodies are outside the purview of the current analysis. Below is a graph of share of union and states in the total public expenditure in India.

Public Expenditure Centre and States

A few things stand out. The union government used to be a massive 65 percent of the overall government expenditure in 1990-91, which was continuously declining for the subsequent decade, until 2003-04. This is good evidence of financial decentralisation. However, the union government share started increasing from 2004-05 onwards, around the time the first UPA government came into power. The latest two years’ numbers are tentative as they refer to budget and revised estimates rather than actual expenditure, therefore we can say that union share has shot up to around 55% of the total in the recent past.

Below is a second graph, this time on the union-state shares of the total development expenditure over the past two decades. Development expenditure refers to expenses on infrastructure, health, education, agriculture, power and more; and leaves out defence, police, administration, interest repayments and several other items.

Development Expenditure - Centre and State

On the whole, union government expenditures are lower here because a few big-ticket, union-only expenses don’t get counted: defence and interest payments being the largest of them. The trends here are a little different.

While the union government share reduced from about 47 percent in 1990-91 to about 37 percent in 1996-97, it started steadily increasing from then to about 2006-07. It has spiked up even more since then, and it is notable that union government share was highest in the last 23 years in 2008-09 at 49.7 percent. This is strong evidence that fiscal decentralisation as a national policy is dead in the water.

Many commentators have noted the relentless centralisation of financial flows in the past few years, with ‘centrally sponsored schemes’ becoming bigger and more numerous by the year. The components that have contributed to this union government expenditure need to be unpacked further to understand what exactly is happening.

Government for 1.2 billion people needs as much flexibility and adaptability as one can give, and this dangerous re-centralisation of public expenditure needs to be reversed.

Notes.

  1. Data collated from Indian Public Finance Statistics Reports 2004-05, 2006-07 and 2012-13.
  2. Data is unavailable for the years 1991-92 to 1994-95.
  3. 2012-13 numbers are budget estimates and 2011-12 numbers are revised budget estimates, so they must be interpreted with care. The rest are actual expenditures.
  4. The y-axes were cropped in the graph to better illustrate the changing trends in the union/state expenditure share.

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