It’s well known that capital expenditure as a proportion of total expenditure has declined in the Union budget. This neglect of capex has led to supply bottlenecks and a slowing of growth in the economy. Many of us feel that it is the centre’s emphasis on social spending and subsidies that has diverted funds from capital formation. But what has been the track record of the states in this regard? Are there two kinds of states—one group giving priority to social spending, while the other puts capital expenditure at the top? Are there really two models of growth among the states, one believing the state should focus on building infrastructure, while the other underlines the importance of social spending?

Not really.

The data seems to suggest that as far as their spending priorities are concerned, most state governments are very much alike, no matter which political party is in power. The numbers show that almost all the states in India spend much more on the social sector than on capital outlays, when these are taken as a proportion of gross state domestic product (GSDP). The solitary exception among them is Arunachal Pradesh.

The chart has the details.

The big surprise is that, as a percentage of GSDP, Bihar has the highest capital outlay among the non-special category states. Its capital outlay/GSDP was 4.2% over 2010-13, well above the average of 2.2% for non-special category states. Goa has the second highest score in this category, followed by another surprise—Uttar Pradesh. West Bengal, at 0.7%, is at the bottom of the list. Some of the states one would expect to be high on the list show very little capital spending by their governments. Maharashtra, Haryana and Punjab all spend much less of their GSDP on capex than the average, while Gujarat spends marginally above the average. On the other hand, states such as Jharkhand, Chhattisgarh and Madhya Pradesh spend more than average.

Interestingly, Bihar also scores very high on social spending. As the chart shows, Bihar’s social sector expenditure (SSE)/GSDP is a very high 10.6%, much higher than the average of 6.9% for non-special category states. But Chhattisgarh comes first, with a SSE/GSDP of 11.1%. Jharkhand and Madhya Pradesh are a joint third, with 9.2%. Gujarat’s spending on social expenditure is well below the average. But Punjab is at the bottom of this list.

For special category states, capital outlay/GSDP for 2010-13 averaged 5.4%, while SSE/GSDP was 11.3%. Arunachal’s spending on capital outlays was 21.1% of its GSDP, while its social spending was 18.9% of its GSDP, between 2010 and 2013. These are states with very little infrastructure and poor connectivity, and governments have to spend a lot on capital expenditure. Of course, as special category states, they receive more funds from the central government.

How can Bihar afford to have such high levels of both social and capital expenditure? Well, it has a high fiscal deficit—estimated to be 5.6% of GSDP for 2012-13, compared with the average of 2.6% for the non-special category states. Chhattisgarh and Madhya Pradesh both had fiscal deficits of 2.9% of GSDP, according to the revised estimates for 2012-13. On the other hand, Maharashtra, which had below-average numbers for both social and capital expenditures, had a fiscal deficit of a mere 1.4%.

But there’s another important factor that allows states such as Bihar to spend so much. Current transfers from the central government, according to the revised estimates for 2012-13, amounted to 16.9% of its GSDP. That’s against the average of 5.2% for non-special category states. States such as Uttar Pradesh, Jharkhand, Madhya Pradesh and Chhattisgarh all have large transfers from the centre.

What has been the trend in state expenditure? For the 2004-08 period, all the states taken together used to spend 5.2% of GDP on social sectors, while capital outlay was 2.2% of GDP. For 2010-13, social sector expenditure by all states was 6.1% of GDP, while capital outlays were 2.1% of GDP.

Of course, the government is not the sole driver of growth and a business-friendly government is very important. States like Maharashtra and Gujarat have done well because of private sector investment. But the data show that political ideology has little to do with the pattern of state government expenditure.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com

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