RBI report on states' finance draws flak

The Reserve Bank of India's observation that developmental expenditure in better-off states like Gujarat, Maharashtra and Goa is declining as a percentage of gross state domestic product (GSDP), whereas such expenditure is rising in underdeveloped states like Bihar and Jharkhand, has invited criticism from analysts.

The RBI, in its latest report 'State Finances: A study of Budgets of 2007-08', said that all states except Gujarat, Maharashtra, Madhya Pradesh and Goa witnessed increase in developmental expenditure as a percentage of GSDP in 2006-07 over the average of 2003-06.

It also held that relatively underdeveloped states such as Bihar (29.2 per cent), Jharkhand (22.1 per cent) and Chhattisgarh (20.2 per cent) had the highest ranking in terms of developmental expenditure-GSDP ratio, whereas West Bengal (8 per cent) and Maharashtra (9.8 per cent) had the lowest ranking.

The report also held that all states except Goa and Gujarat have shown substantial improvement in respect of social sector expenditures like social services, rural development, food storage and warehousing.

"Among all the states, Bihar (18.7 per cent), Jharkhand (13.8 per cent) and Chhattisgarh (13.5 per cent) continued to have higher level of social sector expenditure in terms of GSDP.  On the other hand, Haryana (4.8 per cent), Punjab (5.1 per cent), Gujarat (5.3 per cent), Maharashtra (6.0 per cent) and West Bengal (5.6 per cent) have lower levels of social sector expenditure-GSDP ratio," the report said.

"State governments need to take steps to improve the share of expenditure in education and health for making available these social services to a larger section of population across the states," the report advised the under-performing states.

However, analysts observed that the methodology adopted by the RBI to reach at the conclusions is both "odious and misleading".

"Looking at developmental expenditure as a percentage of GSDP is misleading. One has to look at per capita expenditure, which will be very low in states like Bihar. Additionally, state governments' expenditures, over a period of time, have become non-comparable. This is because since 2003-04, the central government has been directly providing funds to implementing agencies for all its big social sector schemes, which obviously will not reflect in the state governments' expenditures," said M Govinda Rao, director, National Institute of Public Finance and Policy.

Expressing surprise at the outcome of the report, Madhya Pradesh Planning Board vice-chairman Sompal said that the overall public expenditure on development projects in his state had increased 6-10 times over the last four to five years.