The Reserve Bank is worried about rising non-plan expenditure of state governments, which in turn is linked with their growing debt burden. The impact this is having on development is once again the focus of the latest RBI report on state finces. The lion’s share in state expenditure has long been under non-plan head, as much as 70 percent. Such spending is obligatory or committed in ture, which includes interest payouts, certain subsidies, salaries and pensions, and costs of administrative services. As in the past, most states still continue to rely on borrowings — using a substantial part of it to retire earlier debts, rather than increasing their productive capacities. The RBI report points to double-digit growth of outstanding liabilities of state governments since 2012-13, with public debt rising inexorably. ‘The increase in market borrowings of state governments since 2008-09 entails large repayment obligations from 2017-18 onward,’ the report warns. So a bumpy road lies ahead as states grope painfully to find avenues where they can be productive and earn more income. Raising their gross domestic product is not easy, as it requires the necessary assets (physical and human) and infrastructure to be in place through earlier investments. But that has not been the case with state governments forced repeatedly to cut plan expenditures which could have given them such assets. After all, paying interests or salaries always takes precedence over building roads, hospitals or schools.
With little margin for states to cut non-plan expenditure like subsidies, curtailing plan expenditure to limit spending has hurt productivity and growth. The RBI report has expectedly noted that aggregate capital expenditure of states has remained almost stagnt over the years as a proportion to the state output. States may have raised their average capital outlay to output by 0.6 percent from 1.8 percent to 2.4 percent, but they will have to exercise far greater fiscal discipline to make a difference. This will need governce, the hard-headed ability to cut out unproductive expenditure, irrespective of political considerations. Meanwhile, far-reaching developments are unfolding for which states will have to gear up fast, particularly Assam and other Northeast states. Starting next fincial year, the Central government will discard the Planning Commission era practice of classifying expenditure as plan or non-plan. Union Fince minister Arun Jaitley said as much in his budget speech this year, introducing terms like ‘core of the core’, ‘core’ and ‘optimal’ to re-classify Centrally sponsored schemes. Since then, the Centre has reportedly been taking a hard look at various Central and state schemes to make them more effective, reducing the number of sub-components within each scheme, and grouping similar schemes under a single nodal ministry. The five-year plans will become history, with the ongoing 12th and last plan ending with the current 2016-17 fiscal. The NITI Aayog will be looking at medium term planning on a sectoral basis, so that fincial approval of schemes and projects can be synchronized with the Fince Commission cycle. Government expenditure will henceforth be classified as capital or revenue spending. This is expected to give a better direction as to whether government funds are being spent to acquire or improve long-term assets for greater productivity, or spent immediately for ongoing operatiol costs. Accounts will be prepared in a bottoms-up manner to go with the new system of allocating funds at both Central and state levels. For a state like Assam yet to come to terms with the loss of special status, the impending structural changes in Central government planning, approval, funding and programme implementation will present ever greater challenges. The sooner it is studied and prepared for, the better.