Expenditure Implications of India’s State-Level Fiscal Crisis

Abstract

India’s state governments are significant, in some cases dominant, funders of a number of areas critical for enhancing growth and reducing poverty: in 2000/01, 57 per cent of India’s total government capital expenditure was financed by the states, as was 97 per cent of irrigation maintenance, 39 per cent of road maintenance, 90 per cent of public health expenditures, and 86 per cent of public education expenditures. If there is a link from state-level fiscal policy to poverty reduction, it likely runs through the expenditure side. In the late nineties, state government expenditure increased rapidly: aggregate state-government expenditure increased from 13.9 per cent of GDP in 1996/97 to 15.4 percent in 2001/02. Since revenues were stagnant if not falling, this increase of expenditure could only be supported by much higher borrowing, and deficits rose as a result to unsustainable levels. Yet, it might be argued, at least the increase in state government expenditure levels should have had a positive developmental impact. While there has been considerable discussion of the macroeconomic impact of higher deficits in the late nineties (see Pinto and Zahir, 2004, for a recent review), the developmental impact of changes in the overall level and composition of expenditure have received less attention. They are the focus of this chapter. Section 9.2 describes the nature of the state-level fiscal crisis of the late nineties. Section 9.3 reviews the empirical evidence on the impact of public expenditures on poverty reduction and human development, to highlight priority areas where public spending can make a difference. Section 9.4 examines the impact of the fiscal crisis on these priority areas.

This chapter presents the personal views of the authors, not those of the World Bank. We are grateful to Smita Kuriakose for terrific research assistance.