Maha Bharat: Episode 42

State Budgets: Why does nobody care?

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The union budget was announced earlier this month and it was the topic of much discussion. But do we even remember the last time the state we lived in announced its budget? Strange isn’t it? Considering the state budget affects us more directly and even more importantly, considering that the total amount spent as per the state budgets is 150% more than the union budget!

This episode tells you what state budgets are, how they affect our lives, why they’re important and lastly … why nobody cares about them?

Show Notes

All clips and voices used in this podcast are owned by the original creators

Links to clips used in this episode —

Full Transcript of Episode 42 –

Let me ask you this: do you remember when the Union budget was announced earlier this year? I do — Ms. Nirmala Sithararam walked into the Lok Sabha with a red folder. I remember the highlights — a new tax regime, new schemes for agriculture and even the announcement of a New Education Policy. In fact, I have spoken about this in detail on an earlier episode of this podcast.

Now…do you remember when the State Budget was announced — for whichever state you live in right now? What were the highlights? It is quite surprising that state budgets are not spoken about so much.

Did you know – when you combine the budgets of all our states, you’ll find that the states actually spend one-and-half times ya 150% more than the Centre? Not only this, but the states have a more important role to play when it comes to India’s GDP (India ki GDP ki baat ki jaye toh). 

Iss logic se toh state budgets should be discussed and analysed more widely, don’t you think?

We’ll do that today — find out what are state budgets, how they affect our lives, why they’re important and lastly…why does nobody care about them?

State Finances have been in the news recently — but it’s not good news. 

Every year, around october, the RBI conducts a study of the State Budgets and finances. In this study, it analyzes (jaanch karte hai) the budgets of all states and union territories and compares it to ground-reality. 

This year, the RBI released the study on October 29. And this was an important one because, as we know, we’ve been dealing with COVID crisis for most of this year. So, what did the RBI tell us?

According to the report, the COVID-19 crisis, along with the increasing debt (udhari) the states were in and rising expenditure may lead to a difficult few years ahead, for the states. Toh hua yeh tha, that some states presented their budget in February, before the Pandemic caused the economic slowdown. So of course, they did not factor in (dhyaan mein nahi rakha) the extra expenditure on healthcare, loss in employment, etc.

So these states estimated that their gross fiscal deficit (ग्रॉस फिस्कल डेफिसिट) would be 2.4% of the GSDP this year. Wait, wait — what does this mean? 

The Gross State Domestic Product, ya GSDP, in simple words is the total monetary value (keemat) of all the goods and services produced in the state. This indicates the economic growth of the state. Ab Gross Fiscal Deficit is a number that will tell you just how much a state’s expenditure is more than its revenue. If this difference is a large number, then it can be a cause for concern (chinta ki baat ho sakti hai) for the states. 

And while 2.4% is a healthy fiscal deficit for the states, the RBI report said that this might increase to more than 4.5% by next year. In fact, the states that presented their budget after the outbreak of the pandemic also estimated this increased deficit in their budget reports. 

There’s another interesting concept that the states are suffering from (bhugat rahe hai) that the RBI pointed out — the “scissor effect” (please say this in English). This means that there is a loss of revenue in the state. In the beginning of the lockdown, demand went down. And at the same time, the states are having to spend more for expenditures due to the pandemic. This is definitely a stress on the state’s finances. It is called the scissor effect because income and expenditure are moving in completely different directions, like an open scissor.

So, what does this have to do with all of us? 

Sabse pehle, state expenditure actually affects the GDP of the whole country. And this, as we know, has a direct effect on our jobs and salaries! And secondly, something we probably haven’t thought about before: state governments are actually quite heavily dependent on loans for their earnings. They borrow from the market. An increase in their expenditure can actually affect interest rates for us, in the economy. 

The state budgets tell us about our states’ finances, where each state must work harder, what the country’s economy might look like soon — There’s no doubt they’re important to our economy. 

So let’s find out what makes up a state budget!

A State Budget is actually quite similar to the Union or Central Budget. 

The money for the budget comes from the Consolidated Fund of the State…you can think of this Fund as a bank account where all the revenues of the state are collected, and from where all the money for expenditure is taken. So, this budget is divided into two parts: The Revenue Budget and the Capital Budget…

Wait, let’s make this interesting!

I have the data for Kerala’s budget in the year 2016-17. Let’s divide this into two: one, the part of the budget which is recurring or repeating (apne aap ko daurata hai). This is the Revenue Budget. And the other part of the budget is more permanent. It makes changes in the government’s assets and liabilities – This is the Capital Budget. 

For a state, recurring revenues are usually from taxes and grants from the central government. The states also earn from non-tax sources, such as, say…if a state is rich in petroleum products. These are sources that give a state revenue repeatedly. 

Technical shabdo mein ise Revenue Receipts kehte hain.

For Kerala, nearly 50% of these revenue receipts came from tax in 2016. But these tax revenue sources can also change from year to year. 

When the central government introduced GST in 2017, the structure of state budgets changed. Earlier, states used to receive state sales taxes directly — but now, their revenue would have to come from the centre in the form of the State Goods and Services Tax or SGST. Most importantly, it was a matter of cash flow. The centre took much longer than expected to pay the states their share of the GST. This has a big effect on a state budget.

Even something like a natural disaster can change the state budget structure! 

In 2019, as Kerala was recovering from the worst flood it had seen in years, the state government charged 1% extra GST on goods and services for up to two years. This extra tax– jise “cess” kehte hai – was to help the government rebuild Kerala. 

Since Kerala isn’t rich in mineral resources or oil, its other revenues are small, they come from administrative services or from the Central government. All that was recurring revenue.

Now, let’s talk about recurring expenses. What kind of expenses would count as recurring expenses? Salaries of government employees, services, pensions. So that’s the Revenue Side of the Budget. 

When we come to the capital side, what do you guess is the biggest expenditure for a state? 

It’s actually paying back debt. Like I mentioned, most of our states depend on loans. In 2016, Kerala spent 56% of its capital expenditure only on paying back these debts. The rest were spent on schemes and plans of the government. And similarly, almost 90% of Kerala’s capital income receipt comes from recovery of the loans it gives out!

Let’s do a small recap: State Budgets have two parts — Revenue and Capital Budget. Both of these have two more parts – revenue receipts and expenditure. What is a “Revenue budget”? Any receipt or expenditure that appears repeatedly. And “Capital Budget” — any revenue or expenditure that’s permanent, and affects the state (rajya pe prabhav padta hai) in the long term. Apart from this, state governments also announce new schemes, policies and estimates like the Gross Fiscal Deficit.

Accha! — that was quite technical! But this applies to almost all our states. 

[We hear the voice of two ministers commenting on India’s federal structure]

You heard the voice of two state Finance Ministers — Thomas Isaac, the finance minister of Kerala and Amit Mitra, the Finance Minister of West Bengal. 

Why are they both talking about the Federal structure of India? I’ll tell you.

Doston, it is impossible to discuss the state budget without exploring the role of the centre in it. There are two reasons for this: one, India has a federal structure. Quite simply, in this context, this means that our states have a certain amount of autonomy and power. For example, the power to make budgets of their own and implement schemes in the state. 

But the second thing to remember is this: despite this Federal structure, the centre has more power in our country, and certainly power over the states. The states are dependent on the centre for their revenue too — and we saw this in the example of Kerala.

So, while making a budget the state governments keep this whole dynamic in mind. 

So, why were those ministers in the clips we heard questioning the central government?

This story has to do with the Goods and Services Tax. You might remember that when GST was introduced in 2017, it replaced all indirect taxes that the state charged. This meant that a significant portion of the states’ earnings were taken away from them! But the states still agreed to this deal…why? Because the centre promised that in five years’ time, it will compensate all the states for the revenue they have lost. 

Those five years ended in 2020. But the compensation? Yeh toh nahi aaya! 

But now, do you understand why state chief ministers are worried? 

The loss of compensation makes these states weak, which breaks the very first rule of federalism. That’s what our ministers meant. 

State Budgets are an important part of the Federal structure that we are talking about. It is a means for the states to have independence, to decide on the welfare of their states, the funds required to implement this welfare. And lastly, to use this funds for the development of the states. 

A tussle between the centre and the states affects the budget and the state’s finances. 

Doston, yeh mamla kya hai? Why are the states ignored, in all these situations? Their compensation, budgets, schemes…

Like we asked in the beginning, why does nobody care? That’s what we’re trying to find out.

The answer, my friends, lies somewhere in the rights given to the states and as a result, the governance in the state. Let me explain what I mean. 

We already know our Federalism is asymmetrical…matlab, the centre has more power than the states. There are more items on the Union list than the state list — the centre has the power to make decisions about more subjects than the states do. But it is when the centre misuses these rights, that there is a problem. 

For instance, did you know that before 1994, the governor of a state could declare President’s Rule in a state if he or she felt it was necessary? The Article 356 of the Indian constitution has this provision. 

A governor is the centre’s representative in the state — so, he or she belongs to the ruling party at the centre. In this scenario, the governors would often misuse this right over the state government. They would declare the President’s Rule, dismiss the opposition party which ruled in a state and bring their own party to power. But when this happened in 1989 in Karnataka, the Chief S.R. Bommai of the Janata Dal made sure this would never happen again. 

Hua yeh tha, that the Governor P. Venkatasubbaiah declared President’s rule in Karnataka after many members defected from Janata Dal. Chief Minister Bommai went to the Supreme Court to fight this move, and after 5 years, the Court published a set of guidelines that made it difficult for a governor to call the president’s rule without approval from the Parliament. 

This was an example of a power imbalance between the centre and state. This imbalance (asantulan) diminishes the role of the states (rajyo ke bhumika ko chhota kar deta hai) in our legislation. And the result? 

The working of the state governments suffers. 

Did you know that in 2017 the Uttar Pradesh Legislative Assembly met only for 17 days in the whole year? While some state governments uploaded the debates of these legislative assembly meetings, others like Gujarat and West Bengal did not. When the assembly meetings are not revealed to the public, then of course, news channels or newspapers do not even take it up for debate. 

This is what spills over into the state budgets as well!

Do you know what happens when the Union Budget is announced in the Lok Sabha?

First of all, when the government makes the Budget for the year, the Finance Minister consults not only government officials, but external advisors and industry experts. 

On the 1st of February, the Finance MInister presents the budget in the Lok Sabha — and this is followed by extensive debate. The entire event is live streamed for us to watch — aur media debates ki baat toh I don’t have to tell you. 

But what about state budgets?

It might sound unusual, but let me tell you: state budgets are often passed without any debate at all! 

This is for several reasons. Dekhiye, a meaningful discussion of the budget from all the political parties in a state assembly can only happen when the Members of the Legislative Assembly have had enough time to study and scrutinize the budget. On an average, state budgets are 1000 pages long!

But according to data from PRS India, budget discussions in State assemblies begin 24 hours after the budget is introduced. How much will the MLAs have studied in the budget in this short time period?

Another issue is the lack of research support given by the government to our MLAs. A similar problem is faced by Members of Parliaments as well…but while MPs can still find research material in the parliament or get assistance in the capital city of Delhi, what about MLAs of smaller states? They don’t have the same resources as an MP in Delhi would. 

And then there are unique examples, too. In 2015, an intense match between the ruling BJP party and the Opposition – Indian National Congress took place when the Budget was introduced in the Madhya Pradesh State Assembly. 

First, the Congress members did not let the Chief Minister Shivraj Singh Chauhan speak about anything until he addressed the Professional Examination Board scam. So, the BJP members caused a ruckus (halla macha diya). Both the sides argued — BJP members did not let the Congress members speak if their Chief Minister wasn’t being heard. Aur bas, yeh sab halle ke end mein, the budget was passed without any discussion. 

Just the lack of debate or discussion (charcha is kami) is a strong enough reason for state budgets to not interest the media or the public…ask yourself, would you click on a TV channel that showed an assembly announcing a budget and then passing it without any debate or explanations? We all know the answer. 

This is a vicious cycle: when the citizens do not question the assembly debates, the legislators don’t face any pressure. And when the legislators don’t face any pressure to discuss the budget at length, the media isn’t interested!

It’s an interesting situation — tv channels and other media outlets discuss the union budget for days after it is presented. But if we think about it, it is the states that implement the schemes that the centre introduced. Without equal discussion of the state budgets, how will we understand if the union budget has been successful?

And yet, the media, citizens, even state legislators themselves care very little about the State budgets.

I’ve told you that no one cares about State budgets and shown you some examples, but why? Why is this the case?

An article in the Indian Express presents an interesting reason: maybe, it is the “muscle memory”  (please say this in English) of so many decades– yaani, ek tarah se aadat pad gayi hai, that makes us focus on the Union Budget every year, but not our state budgets. 

And while the Union Budget, too, is important for us, our state budgets affect our lives more than we realize. The economist Hasseb Drabu explained it best. He said, “Union Budgets impact your wallet, but state budgets impact your welfare.” 

There are many holes in the system — no access to assembly debates, a lack of research assistance, political tension, as we saw. All of these make for small and big reasons that the state budgets are sidelined as they are. We can’t help fill these holes, but for our part, we can do our best to understand why budgets are important, access information and break decades of “muscle memory”.

That’s it from me for this week! I hope we learnt something new, as every time. I’ll be back next week with a brand new episode of Maha Bharat. 

Credits

Narrated by – Dhruv Rathee
Producer – Gaurav Vaz
Written by – Anushka Mukherjee and Gaurav Vaz
Edited by – Medha V
Title Track Design – Abhijith Nath
Audio Production – Madhav Ayachit