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The burden of agricultural spending has increasingly shifted from the Center to the States

By on April 10, 2022 0

Of total government spending on agriculture, the Center’s share fell from 50% to 37% between fiscal years 2011 and 20, while that of the states fell from 50% to 63%.

The additional tax burden on states due to agricultural expenditures occurs even as they lose more and more revenue due to the GST system.

Fiscal federalism and central-state financial relations have always been a much-discussed topic, with heated debates lately. The total burden of public spending on the Treasury as a share of Gross Domestic Project (GDP) has declined over the past decade, while the burden on State Treasurers has increased.

An analysis of central and state government public expenditure data from 2010-11 to 2019-20 shows that central-state relations have become significantly strained when it comes to agriculture – the sector that supports the majority of the population in India. The analysis was undertaken by the Foundation for Agrarian Studies (FAS) and led by Professor R Ramakumar of the Tata Institute of Social Sciences, Mumbai.

Decreasing share of the Center

The analysis clearly shows the transfer of charge from the government of the Union. Of total government spending on agriculture, the Center’s share fell from 50% to 37%, while the states’ share fell from 50% to 63% between 2010-11 and 2019-20. In other words, while total expenditure was shared equally between the Center and the states a decade ago, state governments now fund nearly two-thirds of total agricultural expenditure in India.


The ratio of government expenditure to output of a particular sector is a measure widely used to assess the importance given by the government to this sector. In agriculture, this measure is measured by dividing government expenditure on agriculture by gross value added in agriculture (or agricultural GVA). This ratio for central government fell sharply, from 10% to 7% during the said period.

States were forced to compensate for this drop by increasing their ratio from 10% to 12%. Despite this transfer of burden to the States, the ratio of total public expenditure (that is to say by adding the expenditure of the Center and the States) fell from 20% in 2010-2011 to 19% in 2019-2020.

Three indicators of decreasing importance

The story remains the same if we consider the different components of the Centre’s agricultural expenditure. More specifically, three illustrations present the decreasing importance accorded by the Center to agricultural development. First, the Center allocates funds to state governments to carry out projects that it has approved under the title of “aid grants”. These allocations to the agricultural sector almost halved (from 0.67% to 0.37% as a percentage of agricultural GVA) between 2010-11 and 2019-20.

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Second, fund allocations for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) have dropped. Expenditure on this as a percentage of agricultural GVA also decreased, albeit slightly, from 2.71% to 2.2% between 2010-11 and 2019-20.

It should be remembered that this is also the period when the dependence on the work of the MGNREGS increased considerably due to the aggravation of the rural crisis. Since states have the responsibility to implement and meet the demand for MGNREGS, the stagnation in the share of MGNREGS allocation has resulted in an increased administrative burden for state governments.

Third, there has been a reduction in spending on agricultural research, extension and training services. The share of central spending on agricultural research fell from 0.41% of agricultural GVA in 2010-11 to 0.23% in 2019-20. For extension and training, the reduction went from 0.2% to 0.06%.

The Centre, by virtue of the resources and hierarchical structure of the national research system, has historically taken the lead in expanding public research and extension services. Therefore, insufficient emphasis on public research and extension services by the Center would have a cascading effect on the ability of states to improve their own research and extension services.

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Centralization of fiscal space

The shifting of the burden and the neglect of the Center towards the key sectors of agriculture occurs in the context of a severe centralization of fiscal space. State taxing powers have been severely compromised by the implementation of the Goods and Services Tax (GST) regime. GST compensation promised to states is constantly delayed, and the Center has virtually made unilateral decisions on GST rates, especially during elections.

Apart from this, the Center has increased indirect taxes in the form of taxes and surcharges. These do not fall under the divisible pool, the pool of resources of which 42% is divided among all the states.

To add further pressure at a time when states are being forced to increase spending, the Center has asked states to meet stricter budget deficit thresholds under the Fiscal Responsibility and Management (FRBM) Act. , which implies additional constraints for government borrowing.

The deepening rural crisis poses new challenges for development. The situation of shifting the burden of agricultural expenditure, in a context of restriction of the financial rights of States, would lead to a situation unfavorable to agricultural development. It is high time for the Center to take substantial measures to respect the financial rights of the states and pay sufficient attention to specific sectors to improve the agricultural and rural scenario of the country.

(The author is a researcher at the Center for Development Studies, Thiruvananthapuram and a research associate at the Foundation for Agrarian Studies)