Examination of Individual State Budgets within India - Financial Year 2024-25
The Index of Budgetary Evaluation (IBE) plays a crucial role in evaluating the fiscal performance and budgetary management of Indian states. This comprehensive index provides insights into the efficiency and effectiveness of state budgetary allocations and expenditures, fiscal discipline, and the capacity of states to mobilize resources and meet welfare and development goals.
The IBE, which ranks state budgets from "zero to a hundred," is instrumental in comparing state-level fiscal health and identifying areas needing reform or investment. It is constructed using the "relative distance model," normalising selected budgeted indicators, averaging sub-indices, and taking the simple average.
The IBE consists of two categories: the Improvement Index and the Deprivation Index. The Improvement Index includes the expenditure quality index, revenue efficiency index, capital outlay index, and budget size index. On the other hand, the Deprivation Index includes the deficit index, debt burden index, and debt servicing ratio.
In the recently announced Odisha Budget 2024-25, the state has achieved the highest IBE score of 80.88. This impressive score is primarily driven by spending quality, capital outlay, and the least debt burden index. If the fiscal marksmanship continues in subsequent years in this trajectory, it will unlock opportunities for higher growth and more employment in Odisha.
Uttar Pradesh holds the third-highest IBE score of 66.88, mainly due to its higher capital outlay and budget size. Jharkhand follows closely with the second-highest IBE score of 75.71, primarily contributed by a low fiscal deficit and higher budget size.
Interestingly, Kerala, Punjab, Tamil Nadu, and West Bengal have the lowest IBE scores among the 17 general category states. This finding underscores the need for these states to focus on improving their budgetary management practices to foster economic growth and development.
In a federal system like India, the fiscal arrangement is such that the Union collects more revenues than it spends, while sub-national governments fall short of revenues to meet their spending. The Union government's transfer of resources to the states is essential for preserving and perpetuating the federation.
Preparing the state budget requires fiscal marksmanship to ensure budgetary forecasting and effective public finance management. The budget for 2024-25 of 17 general category states of India is evaluated through the IBE. The budget is a principal administrative tool and legislative control instrument, with the main objective of enforcing the economy.
The IBE encourages better budget planning and allocation aligned with the states’ development priorities. It facilitates financial discipline and transparency, which can attract investments and improve credit ratings for states. Furthermore, it helps states optimise the use of resources, focusing on infrastructure, education, health, and innovation, which are critical for sustainable economic growth.
In essence, the IBE helps provide a structured and objective framework for evaluating how well states are using their budgets to foster economic growth and development, ultimately guiding policy reforms and improving fiscal management standards. The author, a professor in finance at XIMB, XIM University, Bhubaneswar, emphasises the importance of the IBE in promoting sound financial management practices and ensuring positive economic outcomes.
- The IBE's comprehensive evaluation, which includes categories like the Improvement Index and Deprivation Index, provides a valuable tool for states to identify areas requiring reform or investment in areas such as finance, business, and personal-finance.
- In the realm of education and self-development, the IBE encourages efficient budget planning and allocation, particularly within sectors crucial for sustainable economic growth, such as infrastructure, education, health, and innovation.
- With sports often requiring significant investments for development and infrastructure, the financial discipline and transparency facilitated by the IBE could potentially attract investments towards sports sectors in various states, contributing to their overall economic growth.
