India’s poorest states are stuck in a low-income, low-spending trap but Brazil’s model may show a way out

I first classified 20 states that account for the bulk of India’s population (and for which relevant data was available) into four broad groups based on their level of economic and social development.

These are a group of ‘balanced development states,’ with higher than median levels of both economic development and social development; a group of ‘growth oriented states’ with higher than median levels of economic development but below median social development; a group of ‘social development oriented states’ with higher than median levels of social development but below median economic development; and a fourth group of ‘lagging states’ where economic and social development are both below the median level.

Comparing the economic and social development of the 20 states with their fiscal performance underlines the development dilemma of lagging states: namely, Assam, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Rajasthan and Uttar Pradesh.

The level of public spending in these states is comparatively very low. For instance, in 2022-23, per capita government spending of around ₹17,000 per capita in Bihar was only about one-fourth that of Himachal Pradesh at ₹67,700.

However, there is little fiscal space for these states to step up public spending. Revenue receipts from their own sources are typically much lower than in the better-off states. Again, taking Bihar as an example, it raises less than 30% of its total revenues from its own sources, compared to over 80% in Haryana.

The balance revenue in these states comes as transfers from the central government, mostly as formula-driven shares of a shareable pool for all states and partly as discretionary grants for centrally sponsored schemes (CSS). Their only other source of expenditure financing is borrowing.

However, their capacity to borrow is quite constrained, since their indebtedness (relative to gross state domestic product) is much higher on average at 31% compared to around 25% for better-off states. Their annual fiscal deficits, at around 3.4% on average, are also higher compared to 2.4% for better-off states and higher than permissible under the states’ fiscal responsibility and budget management laws.

Thus, with revenues tightly constrained and their borrowing capacity also very limited, India’s lagging states have little scope to step up their spending. Nor is there much scope for better outcomes through improved allocation of expenditure. Their average outlay for capital expenditure, at close to 16% of the total, is already higher than that of ‘balanced development’ states and equal to that of ‘growth oriented’ states.

Similarly, their allocation for social expenditure, at nearly 40% on average, is higher than that of ‘growth oriented’ or ‘balanced development’ states and similar to the 41% share in ‘social development’ oriented states.

Thus, India’s lagging states are caught in a low-income, low public expenditure trap. Their resources and borrowing capacity are very limited while the allocation of expenditure for development is already as good as or better than in the higher income states. But their level of per capita income or social development is far behind.

What can they possibly do to accelerate development? Perhaps their only way forward is to significantly improve the efficiency of government spending to get a bigger bang for the buck. Can this be done?

I have suggested a two-tier performance-linked approach for development expenditure. Such spending at the state level can be increasingly channelized through conditional cash transfers (CCT) linked to the performance of beneficiaries. For instance, income transfers to beneficiaries can be linked to their children’s school attendance or their vaccination record.

This approach has been successfully followed for decades in Brazil’s Bolsa Familia programme, the world’s largest CCT scheme now being progressively replicated in several countries. It lifted millions of Brazilian households out of poverty during the first Luiz Inácio Lula da Silva regime and has now been revived during his second stint as president.

In India, at the central government level, CSS transfers to states can be linked to their adoption of the CCT approach where relevant. Indeed, much reform is required in our CSS programme. It is highly skewed, with a long tail of token schemes. In the last budget, nearly ₹5.5 trillion was allocated to some 75 centrally sponsored schemes, of which the four largest have been allocated nearly 20% of the total CSS budget.

The allocation for the largest 15 is about a third of that budget. However, my calculations indicate that the allocation even for the 15th largest programme is less than a token one rupee per beneficiary! Allocations for the other 50 schemes would be even thinner.

Instead of this colossal waste, the long tail of token programmes can be abolished, while allocations are further expanded for the largest four: the Samugra Shiksha Abhiyan, National Health Mission, Pradhan Mantri Gram Sadak Yojna and PM Poshan (the mid-day meal scheme).

Further, for the two largest schemes, education and health, top-down micro designing can be replaced by flexible schemes that states can adapt to their specific conditions. However, their content can be modified to include a significant CCT component in both. This alignment of incentives is essential to ensure that government spending becomes more efficient.

These are the author’s personal views.

The author is chairman, Centre for Development Studies.