States spend more on development as revenues rise

The success on the fiscal consolidation front over the past few years has prompted several state governments to now embark on more spending, including on large infrastructure projects, to help keep the growth engine humming.

Many states are now loosening their purse strings to launch development projects, given the comfort of robust revenues fuelled by high economic growth and higher transfers from the Centre.

During the past two years ending FY08, the development expenditure of the state government has expanded at a compounded growth annual rate (CAGR) of 19%.

This is in sharp contrast to the phase in 2003-06, when their aggregate expenditure, including development expenditure, stagnated. States are now investing more in highways, building roads, irrigation, telecommunication, urban development and housing.

States appear to have shed painful memories of a cut back on spending, after their finances were hurt following the implementation of the recommendations of the Fifth Pay Commission. That period coincided with a slowdown, which further compounded the problems of state governments.

In FY08, all state government put together are expected to spend a total of over Rs 4.68 lakh crore on development projects, 42% more than the corresponding amount in FY06. The amount accounted for 61% of their aggregate expenditure up from 52% in FY05, according to data provided by the Reserve Bank of India.

Five years ago, state governments��� deteriorating fiscal conditions were a major cause for concern, with the burden of higher salaries widening their fiscal deficits. Pushed to a corner, states governments were forced to prune their expenditure. The easy way out was to slash development expenses, which was reflected in stagnant expenditure.

The improvement in the finances of states, especially on the revenue account, will provide the fiscal space for an increase in development expenditure. Spending on sectors such as education, irrigation and transport are set to go up.

Education, which accounts for more than one-fifth of total development expenditure, has already recorded a CAGR of 14% during FY05-08. Irrigation, which has the second largest share at 12%, witnessed a rise of 20% during FY05-08. Transport is another sector to receive higher attention as spending has growth at CAGR of 28% during FY05-08.

Apart from these traditional sectors, urban development, social security and welfare of SC/STs have drawn the attention of state governments, having witnessed a substantial increase in last year���s budget. However, there has been hardly any increase in energy sector spending.

Expenditure on energy recorded the lowest CAGR of 10% during FY05-08. It remains to be seen whether the trend will continue. The mounting pressure to follow the Centre in announcing a pay hike to employees, the slowdown in the economy, which could have a knock-on effect on revenues, may threaten to spoil the party.