1. INTRODUCTION:

The financial condition of any economy (state economy) has special impacts on the social and economic lives of the citizens of that country. Certainly, the increase in per capita real income is an indicator of economic growth, but it is not necessary the case for economic development. Economic development includes welfare in addition to economic growth. Welfare depends on the development of social services, which too a large extent depends on expenditure strategies adopted by the government. There have been many studies in the past that explain the impact of income on the social sector in many ways; some of them are discussed here to see the gaps in this study.

Badola and Mukherjee (2021) highlighted that the role of public financing of human development (HD) is inevitable, especially for developing countries like India where access to resources and economic opportunities are not equitably distributed among people. The author found that due to the deteriorated financial condition of governments due to COVID-19, there is a possibility that a larger share of public expenditure will be devoted to providing livelihood supports to people in terms of free foods and income support, whereas expenditures on health (except emergency healthcare) and education infrastructure may be postponed or reduced.

Joshi (2006) found that India has indeed made noticeable improvements in key social indicators such as education and health since the 1980s, mainly as a result of large-scale government programs. But even then, the conditions with respect to social sector development in India are appalling when compared with conditions prevailing in countries like Sri Lanka, China, and some countries of south-east Asia. The educational and health status of a vast majority of the population continues to remain poor even after a decade of reforms which demand an immediate and sustained response from the government.

Sahu and Brahme (2016), examined the expenditures of the Chhattisgarh government, from 2001-2012 by using secondary data, on public health, social security and welfare, and general education and found that the resources needed for public health are relatively neglected. Expenditures incurred for social security and welfare have been higher than those for public health expenditures. Observing the compound growth rate, it can be said without doubt that the expenditure for each head has increased from the initial years, but the fact is that the population has increased many folds. Thus, a major chunk of GSDP is needed to maintain administrative functionality, which leads to an increase in non-productive expenditure.

Mittal (2016), found inequality in social sector expenditure resulted inequal human development in the states. At the policy level, the study recommends more public expenditure to achieve balanced and improved human development in India. The study also looks at the composition of social expenditure, where it shows that states’ share of capital expenditure in total social sector expenditure has improved over the years, but its share has been very small as compared to the share of revenue expenditure. Budgets are recommended to be adequately allocated to provide support to policies and programs necessary to achieve the growth and development of the country.

Eswaran and Selvamurugan (2018) evaluated central government spending in India from 2007-08 to 2015-16. The authors discovered that non-developmental expenditure dominated overall expenditure as compared to developmental expenditure. The government has been exposed to more risk in terms of non-developmental expenditures such as interest payments and defence services. It is emphasized that the government spends money on non-developmental areas like as pensions, elections, subsidies, incentives, grants-in-aid, and so on, which may result in the funds being misused. As a result, the government should allocate funds and make spending decisions based on the needs of the economy's productive sectors.

Budhedeo (2018), examined the nature and direction of the causal relationship between public expenditure and economic progress in India for the period 1970–2016. Two models of Wagner’s law have been examined for this purpose. The Peacock-Wiseman traditional version and the Gupta/Michas version of Wagner’s hypothesis establish associations between government expenditure and gross domestic product in gross terms and per capita terms, respectively. The two interpretations of Wagner’s law have been empirically tested for Granger causality following the cointegration technique. The empirical analysis has been carried out in three steps. First, the time series variables are tested for unit roots; second, the long-run relationship is examined between variables for the two models expressing Wagner’s law; in the third step, Granger causality is established between bivariate pairs of public spending and national income. Wagner’s law does not get support from either model in the Indian case. However, the Keynesian hypothesis is found to persist in the long run, with a unidirectional causality running from public spending to national income. The author explained that government activities will play an important role in influencing economic development in the country in the long run.

Lamartina, Serena, and Zaghini, Andrea (2019), examined the development of government expenditure and economic growth in 23 Organization Economic Cooperation and Development countries. The empirical evidence provides indication of a structural positive correlation between public spending and per-capita gross domestic product (GDP), which is consistent with the so-called Wagner’s law. A long-run elasticity larger than 1 suggests a more than proportional increase in government expenditure with respect to economic activity. The author found that the correlation was higher in countries with lower per-capita GDP and suggested more development by government activities with respect to economies in a more advanced state of development. It may be inferred from the present review of past studies that economic growth and fiscal indicators may impact the social sector expenditures of any economy in many ways. The above studies explained human development and welfare with social expenditures, whereas the present study tries to explain human development with fiscal key indicators of states in addition to economic growth to bridge the gaps with the reviewed studies.

In light of the above facts, in the present study, it is tried to find the impact of the financial condition of all states and union territories of India, at aggregate level, on the expenditures on social services in many ways, which constitute the following objectives:

1. To examine various kinds of budget deficits of the state governments at the aggregate level,

2. To evaluate the expenditure incurred by state governments at the aggregate level on social services and

3. To calculate the elasticities of expenditure on social services for the various categories, i.e., revenue and capital expenditure, and for various sub-heads of these categories, at the aggregate state level, and find the areas where states may reschedule their priorities, policies, and expenditures to raise the level of human development and welfare in society.

2. DATA SOURCES AND METHODOLOGY:

The present study is based on secondary data, which covers the period from 2011-12 to 2021-22 for all states at the aggregate level in India. Simple linear regression and simple statistical tools like ratios and percentages have been used to examine data on various variables. Data has been collected from the following sources:

· Reserve Bank of India (RBI), Handbook of Statistics on State Government Finances, 2021–22.

· Reserve Bank of India (RBI), State Finances: A Study of Budgets, 2021–22.

3. MAJOR FISCAL KEY INDICATORS AT AGGREGATE STATE LEVEL:

Table I exhibits the trend of major fiscal indicators as a percentage of the GSDP of states at the aggregate level. It can be seen that, in the early years of the study period, there was a revenue surplus in the accounts of the state governments, which increased to 2 percent deficits as a percentage of GSDP till the year 2020–21. No doubt, this may be due to COVID-19 to a large extent. The situation can be seen to be worse for the fiscal deficits, which increased to 4.7 percent of GSDP and had been around 3.7 percent by the end of the study period. They seem to unfollow the path of the FRBM Act of 2003. Primary deficits also increased to 2.7 percent in 2020–21, followed by a decline of 1 percent by the end of the study period. The primary deficit is equal to the fiscal deficit minus interest payments, which explains the scope for which governments can make policies to reduce wasteful or unnecessary expenditures to improve their fiscal accounts. Increasing ratios of primary deficits also seem to be a matter of concern, which explains the limited scope for the state to reduce its unnecessary expenditure. Interest payments have been around 1.5 to 2 percent of GSDP over the study period, with no significant reduction in interest payments during the study period. The FRBM Act suggests that the states have to try to bring their fiscal deficit down to 3% of GDP, but this seems impossible as the interest payments of most states are around or even more than 2% of GSDP. The high share of debt servicing in the fiscal deficit challenges the sustainability of debt at the aggregate state level.

High levels of interest payments converted surpluses into deficits in the revenue accounts of the states. It can be seen that if there had not been such high debt services, there would have been a revenue surplus in the accounts of the state government at the aggregate level, and the same situation could have been for individual states, which is not a matter of study here.

4. PATTERN OF EXPENDITURE ON SOME IMPORTANT COMPONENTS OF SOCIAL SECTOR:

Social services are the various types of services provided by the government to the common people of society that are used by people on a daily basis. Due to externalities engaged with these services, these are called public goods or services. Social services include education, sports, art, culture, medical facilities, family welfare, water supply and sanitation, housing, urban development, the welfare of SC/ST, labour welfare, social security, nutrition, natural calamities, and others services. Revenue and capital, both kinds of expenditures on social services, are examined together in the present study to examine the various ratios of expenditure on social services.

Various ratios of total expenditure on social services are presented in Table II. Expenditure on education as a ratio of aggregate expenditure declined by 2.9 percent basis during the study period, and as a percent of GSDP, the ratio has also been stable around 2.6 percent. Statistics do not appear to reveal any satisfactory situation for development in terms of expenditure on education. The situation has been extremely disappointing.

Table 1: Major Deficit Indicators of State Governments

As a Percentage of GDP
Year	Gross Fiscal Deficit	Revenue Deficit	Primary Deficit	Primary Revenue Deficit	Net RBI Credit to States
1	2	3	4	5	6
2011-12	(1.9)	(-0.3)	(0.4)	(-1.8)	(-0.0)
2012-13	(2.0)	(-0.2)	(0.5)	(-1.7)	(-0.0)
2013-14	(2.2)	(0.1)	(0.7)	(-1.4)	(0.0)
2014-15	(2.6)	(0.4)	(1.1)	(-1.2)	(0.0)
2015-16	(3.1)	(0.0)	(1.5)	(-1.5)	(-0.0)
2016-17	(3.5)	(0.3)	(1.8)	(-1.4)	(0.0)
2017-18	(2.4)	(0.1)	(0.7)	(-1.6)	(0.0)
2018-19	(2.4)	(0.1)	(0.8)	(-1.6)	(-0.0)
2019-20	(2.6)	(0.6)	(0.9)	(-1.1)	(0.0)
2020-21 (RE)	(4.7)	(2.0)	(2.7)	(0.0)	(0.0)
2021-22 (BE)	(3.7)	(0.5)	(1.7)	(-1.4)	(0.0)

RE: Revised Estimates. BE: Budget Estimates $: Based on latest GDP.

Notes: 1. Negative (-) sign indicates surplus in deficit indicators.

2. Revenue deficit is the difference between revenue expenditure and revenue receipts.

3. Gross fiscal deficit is aggregate expenditure (aggregate disbursement net of debt repayments) minus revenue receipts and non-debt capital receipts.

4. Primary deficit is gross fiscal deficit less of interest payments.

5. Primary revenue deficit is revenue deficit less of interest payments.

6. The net RBI credit to State Governments refers to annual variations in loans and advances given to them by the RBI net of their incremental deposits with the RBI.

8. Data from 2017-18 onwards include Delhi and Puducherry also.

Table 2: Various Ratios of Expenditure on Social Sector

Particulars	2011-12	2012-13	2013-14	2014-15	2015-16	2016-17	2017-18	2018-19	2019-20	2020- 21(RE)	2021- 22(BE)
(1) All States and UTs Expenditure on Education as a ratio of Aggregate Expenditure	16.3	16.4	16.5	16	15.3	14.7	15	14.4	15.1	14.3	13.6
(2) All States and UTs Exp on Education (% to GDP)	2.5	2.5	2.5	2.6	2.6	2.6	2.6	2.5	2.6	2.7	2.6
(3) All States and UTs Expenditure on Medical, Public Health and Family Welfare as a ratio of Aggregate Expenditure	4.2	4.3	4.4	4.8	4.7	4.6	5	5	5.1	5.6	6
(4) All States and UTs Exp on Medical, Public Health and Family Welfare (% to GDP)	0.6	0.7	0.7	0.8	0.8	0.8	0.9	0.9	0.9	1	1.2
(5) Social Sector Expenditure as per cent of Total Disbursement	38.7	39.3	39.8	41.0	41.1	41.7	41.1	40.2	40.4	40.9	42.5

Note:(i) Aggregate Expenditure included revenue and capital, both kinds of expenditure, on social services. (ii) Total Disbursement includes revenue and capital expenditure on social and economic services (including payments of loans for these heads).

Source: RBI, State Finances: A Study of Budgets.

Table 3: States’ Expenditure on Medical and Public Health, Family Welfare and Water Supply and Sanitation

Per cent of GDP

Year	Total Expenditure*	Medical and Public Health*	Family Welfare*	Water Supply and Sanitation*	Medical and Public Health, Family Welfare and Water Supply and Sanitation*
	(1)	(2)	(3)	(4)	(2+3+4)
2020-21	17.2	0.9	0.2	0.4	1.4
2021-22 (BE)	18.0	1.0	0.1	0.5	1.7
*Source:* RBI, State Finances: A Study of Budgets

The situation has been slightly better in terms of medical services compared to education. Expenditure on medical, public health, and family welfare as a proportion of aggregate expenditure increased by 1.8 points during the study period, and as a percentage of GSDP, it increased to above 1 percent by the end of the study period. There is no doubt that the increase in expenditure ratio for medical purposes in 2020 is definitely due to COVID-19. In the absence of this natural disaster, the situation would have been different.

Social sector expenditure as a percent of total disbursement increased from 38.7 percent in 2011–12 to 42.5 percent in 2021–22. Social sector expenditure as a percent of total disbursement increased from 38.7 percent in 2011–12 to 42.5 percent in 2021–22. In spite of the unsatisfactory status of expenditure on education, this 3.8 percent increment in expenditure on social services in total disbursement gives satisfaction to some extent.

The expenditures of states on medical and public health, family welfare, water supply, and sanitation as percentages of GSDP are shown separately in Table III. This data was available only from 2020–21; hence, only previous years of the study could be included, which may be taken as a limitation of the study. Expenditure for all social services, mentioned in Table III, has been around only 1.5 percent of GSDP. Nominal growth is noted for these services.

5. INCOME ELASTICITIES OF STATE GOVERNMENT

Expenditure on Social Services

Income elasticity of Expenditure can be defined as a percentage change in expenditure with respect to the percentage change in income of the state or government, i.e., the Gross State Domestic Product (GSDP).

Percentage change in Expenditure

Expenditure Elasticity = ----------------------------------

Percentage change in GSDP

In the present study, expenditure elasticities are calculated separately for Revenue Expenditure (REXP) and Capital Expenditure (CEXP) on social services. Revenue expenditures are the ongoing operating expenses, which are short-term expenses used to run the daily activities whereas, Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue generation over a longer period.

Assuming a Log linear relationship between expenditure and state income, the following regression equations have been used to estimate expenditure elasticities for revenue and capital expenditure on social services, respectively:

Ln (REXP) = α + β Ln (GSDP)---------------------------(1)

Ln (CEXP) = α + β Ln (GSDP)---------------------------(2)

The estimate of α would signify the logarithm of the level of expenditure when the state domestic product normalises to unity. β represents the elasticity of expenditure. The elasticity would be higher, expected, or lower depending on whether the estimated value of B is greater than, equal to, or less than unity, i.e., β >, =, <1. This implies that expenditure will grow faster, equal to, or less than the growth rate of state domestic product, depending on whether β >, =, or <1.

6. ANALYSIS OF RESULTS:

Results obtained from OLS expenditure equation 1 have been presented in Table IV. The values of R² have been low or moderate, whereas the corresponding values of F statistics were found satisfactory except for the welfare of Scheduled Castes, Scheduled Tribes and Other Backward Classes, Labour Welfare, Nutrition, Natural Calamities and Others. Table IV shows that the elasticities of revenue expenditure on various social services have been more than 1, but for nutrition, they have been very low, which points towards hunger. Although revenue expenditure elasticities for Education, Welfare of SC/ST, Labour Welfare and Natural Calamities have been greater than one but these services could catch these figures of elasticities barely.

There has not been any data for capital expenditure on labour welfare, nutrition and natural calamities, due to which, study of the only remaining compositions of capital expenditure on social services has become possible. Results obtained from OLS expenditure equation 2 have been presented in Table V. Like revenue expenditure, values of R² for capital expenditure on most of the social services were also found to be low and moderate, whereas corresponding values of F-statistics were found satisfactory except for Housing. Capital expenditure elasticities for Medical and Public Health and Housing health and housing have been below 1, indicating a low increase in capital expenditure for these services. Capital expenditure on social services seems to follow the deteriorated financial condition of states at the aggregate level by the end of the study period.

Table 4. Income Elasticities of Revenue Expenditure on Social Services

Ln (REXP) = α +β Ln (GSDP)

Expenditures

Intercept

(t-Value)

LN (GSDP)

(t-Value)

(F-Value)

Revenue Expenditure on Social Services (1 to 12)

-10.312

(-2.113) **

1.452

(4.901)

0.750

(24.017)

1. Education, Sports, Art and Culture

-3.734

(-.689)

1.004

(3.052)

0.538

(9.314)

2. Medical and Public Health

-13.171

(-2.735) *

1.498

(5.125)

0.767

(26.263)

3. Family Welfare

-11.430

(-2.177) *

1.283

(4.025)

0.669

(16.197)

4. Water Supply and Sanitation

-23.869

(-2.716)

2.069

(3.877)

0.653

(15.028)

5. Housing

-24.438

(-2.807)

2.080

(3.933)

0.659

(15.467)

6. Urban Development

-20.603

(-3.245)

1.901

(4.932)

0.752

(24.322)

7. Welfare of Scheduled Castes, Scheduled Tribes and Other Backward Classes

-5.909

(-.894)

1.027

(2.559) *

0.450

(6.548)

8. Labour Welfare

-10.744

(-1.323)

1.025

(2.444) *

0.428

(5.974)

9. Social Security

-13.171

(-2.735) *

1.498

(5.125)

0.767

(26.263)

10. Nutrition

9.972

(169.365)

0.002

(0.499) ***

0.030

(0.249)

11. Natural Calamities

-6.987

(-.788)

1.038

(1.927)

0.317

(3.713)

12. Others

-16.170

(-3.359)

1.498

(5.125)

0.030

(0.299)

Note: ‘*’ indicates Significant at level of 5 percent,

‘**’ indicates Significant at level of 10 percent,

‘***’ indicates Insignificant value.

Source: Calculated by Author.

Table 5. Income Elasticities of Capital Expenditure on Social Services

Ln (CEXP) = α +β Ln (GSDP)

Expenditures

Intercept

(t-Value)

LN (GSDP)

(t-Value)

(F-Value)

Capital Expenditure on Social Services (1 to 9)

-14.275

(-1.816) **

1.547

(3.241)

0.568

(10.502)

1. Education, Sports, Art and Culture

-16.275

(-2.070) **

1.547

(3.241)

0.568

(10.502)

2. Medical and Public Health

-5.799

(-.712)

0.923

(1.865) **

0.303

(3.479)

3. Family Welfare

-38.196

(-3.018)

2.666

(3.469)

0.601

(12.034)

4. Water Supply and Sanitation

-16.860

(-2.035) **

1.631

(3.243)

0.568

(10.514)

5. Housing

-3.534

(-.317)

0.749

(1.108) ***

0.133

(1.228)

6. Urban Development

-18.005

(-2.020)

1.677

(3.098)

0.545

(9.595)

7. Welfare of Scheduled Castes, Scheduled Tribes and Other Backward Classes

-12.430

(-2.367)

1.283

(4.028)

0.669

(16.197)

8. Social Security and Welfare

-11.569

(-1.405)

1.183

(2.365)

0.412

(5.595)

9. Others *

-8.734

(-1.612)

1.004

(3.052)

0.538

(9.314)

Note: ‘*’ indicates Significant at level of 5 percent,

‘**’ indicates Significant at level of 10 percent.

‘***’ indicates Insignificant value.

Source: Calculated by Author.