Lower deficits over development?

Moa Jamir

Understanding how Nagaland cuts budget deficits

One of the significant highlights of the State Budget 2023-24 presented by the Chief Minister and  Minister-in Charge of Finance, Neiphiu Rio in the recently concluded 1st session of the 14th Nagaland Legislative Assembly was the substantial reduction in the accumulated budget deficits.   

As per the budget estimates, the deficits is expected to reduce from Rs 2212.74 crore in 2022-23 to Rs 1371.17 crore in 2023-24, or by Rs 841.57 crore, indicating a percentage decrease of approximately 38%. Besides, a reduction in budget deficit being rare, it is also the magnitude of the cut that garnered attention and was vaunted by those at the helm of affairs.

While acknowledging this 'achievement,' it is essential to understand how it was achieved and the resultant implications for the state's overall economic development. Detailed analysis of the budget documents suggests that there were both positive as well as negative developments in reducing the cumulative deficit.

The key drivers of this cut in budget deficits, as highlighted by the Chief Minister in his budget speech, were the increase in the State's revenue from its own sources and from the Union Government. The State's own revenue is estimated to increase from Rs 1708.11 crore in 2022-23 to Rs 1950.56 crore in 2023-24. Likewise, the State's share of central taxes increased from Rs 4646.80 crore to Rs 5812.05 crore, for a combined increase of Rs 1407.25 crore. This increase in revenue may have given the State the flexibility to reduce its budget deficit.

The cut in budget deficits can also be achieved through a reduction in expenditure, and cutting non-development expenditure is considered prudent fiscal management. However, in the case of Nagaland, the opposite occurred. In a concerning scenario, the State's Developmental Expenditure, which includes State Programmes, CSS (Centrally Sponsored Schemes), NEC, NLCPR, and EAP, decreased significantly from Rs 5815.13 crore in 2022-23 to Rs 4265.66 crore in 2023-24. Though the cut in developmental expenditure under CSS etc. may be beyond the control of the State Government, it has strong implications.

Conversely, the Non-Development Expenditure is expected to increase from Rs 10410.19 crore to Rs 11491.76 crore during the same period. In fact, statements under the Nagaland Fiscal Responsibility & Budget Management Act, 2005 (2023-24), informed that development expenditure has grown at an average annual rate of 8.28% since 2010-11, while non-development expenditure has grown at an average annual rate of 11.78%. Barring 2020-21, when there was a negative growth of -2.84, non-development expenditure has grown massively from Rs 3304.49 crore in 2010-11 to an estimated Rs 11491.76 crore in 2023-24. The percentage growth ranged from 7.56% to 23.45%.

Developmental expenditure typically includes investments in infrastructure, education, healthcare, and other areas critical to a state's long-term economic growth and social welfare, and any reduction can have significant implications for economic growth and social development. Hence, reducing such expenditures may limit the state's capacity, while surging non-development expenditure is a precursor to strained financial health in the future.

Notably, the Chief Minister has announced a modest increase in the State's Development Outlay for the current fiscal year at Rs 820 crore, up 5.49% from 2022-23 when it was fixed at Rs 775 crore. While this increase is welcome, it remains to be seen whether it will be sufficient to meet the State's long-term developmental goals and it pales in comparison with the cut in Development expenditure, particularly under CSS, etc. Incidentally, the estimated total receipts and expenditures of the State have also shrunk to Rs 23145.66 crore and Rs 23085.66 crore respectively, from Rs 24389.80 crore and Rs 24239.50 crore in the previous fiscal. This suggests that the State, among others, has an overall decrease in economic activities, although budget data also indicate cuts in internal debts and central assistance (grants and loans).

Despite the concerning cut in development expenditure, the decrease in budget deficits, along with the rise in the State's revenue sources and apparent trimming of borrowing, are positive steps. However, the increase in revenue must not be taken as a ‘license’ to spend unhindered on non-development expenditure. As a basic economic lecture would suggest, it is important for the State to carefully monitor its budget and prioritize expenditures. Non-development expenditures-led deficit financing is a recipe for disaster, and those at the helm of affairs must ensure that the trade-offs involved in cutting budget deficits must always be in favour of developmental expenditure to promote long-term economic growth and social development.

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