Figuring it out: Stately situation
The budgeted improvement in state finances in 2007-08 is largely revenue driven - revenue receipts are projected to increase by 0.2 percentage points in 2007-08 to 13.1% of GDP.
By Vinay Pandey, TNN |
The Reserve Bank of India’s (RBI’s) analysis of state budgets for 2007-08 shows further progress on fiscal correction and consolidation. Twenty-six states have already enacted the Fiscal Responsibility legislation. The impact is evident in the consolidated budget for the state governments, which shows a revenue surplus (0.3% of GDP), after a gap of two decades, in 2007-08. And the gross fiscal deficit is budgeted to decline further to 2.3% of GDP in 2007-08 from 2.8% in 2006-07 (RE). The budgeted improvement in state finances in 2007-08 is largely revenue driven — revenue receipts are projected to increase by 0.2 percentage points in 2007-08 to 13.1% of GDP.
States have benefited from a larger, Twelfth Finance Commission-mandated, devolution and transfers from the Centre and an improved tax performance because of the economic buoyancy and introduction of value-added tax (VAT). The overall improvement in state finances, though welcome, hides many anomalies. The RBI study, for instance, has pointed out the high variation in fiscal performance across states. A few states account for the large part of the overall improvement in state finances — 15 states have in fact budgeted for a higher gross fiscal deficit in 2007-08.
The growth in states’ own tax revenue is also only in line with the growth in GDP, as evident from only a 0.2 percentage point improvement in tax-to-GDP ratio in the past three years. This implies that while states have undertaken some tax reforms, it is yet to show up in the numbers. Non-tax revenue, too, continues to stagnate at 1.3% of GDP, which indicates little progress in cost recovery from various services provided by the states.
Even in the case of economic services such as irrigation, power and roads, the cost recovery (ratio of non-tax revenue to non-plan revenue expenditure) through appropriate user charges continues to be low. In the case of roads, for instance, it’s budgeted to decline sharply from 21.5% in 2003-04 to 7.6% in 2007-08. Recovery in the case of power is budgeted to increase 23.6% in 2007-08 from 15.7% in the previous year, though there is no apparent reason for this improvement.
Expenditure management, the other important element of fiscal reform, also requires more attention, at least the qualitative aspect of it. States’ overall expenditure is budgeted to decline to 12.8% of GDP from 13% in the previous year. But expenditure on interest payments, administrative services and pensions are set to increase at a fast pace. The non-development expenditure, therefore, continues to be high.
Though such expenditure is budgeted at 5.3% of GDP in 2007-08 against 5.4% in 2006-07 (RE) and 5.9% average for 2000-05, it is much higher than 4.3% for 1990-95 and could well be more than 5.3% eventually. There is also a risk of a substantial Sixth Pay commission award undoing the progress the states make. Once the Centre decides to hike salaries, states would be also under pressure to set up pay commissions.
It is evident that states’ own revenue performance, both tax and non-tax, has to improve to ensure they are in position to absorb the adverse impact of any economic downturn and pay commission awards, and allocate more to capital expenditure to create more and better delivery capacities. For instance, with moderation in stamp duty and property tax rates, states should be able to improve revenue on this count. States such as Delhi have already seen a spurt in property registration after transfer charges were lowered.
In the case non-tax revenue, better service delivery should enable states to levy appropriate user charges and improve cost recovery at least from economic services. Electricity reforms can make a visible dent in states’ finances, as under recovery from electricity is a big cost item for most states. Simple reforms such as distribution metering can help check theft, which as of now is passed off as losses to the farm sector.
States have benefited from a larger, Twelfth Finance Commission-mandated, devolution and transfers from the Centre and an improved tax performance because of the economic buoyancy and introduction of value-added tax (VAT). The overall improvement in state finances, though welcome, hides many anomalies. The RBI study, for instance, has pointed out the high variation in fiscal performance across states. A few states account for the large part of the overall improvement in state finances — 15 states have in fact budgeted for a higher gross fiscal deficit in 2007-08.
The growth in states’ own tax revenue is also only in line with the growth in GDP, as evident from only a 0.2 percentage point improvement in tax-to-GDP ratio in the past three years. This implies that while states have undertaken some tax reforms, it is yet to show up in the numbers. Non-tax revenue, too, continues to stagnate at 1.3% of GDP, which indicates little progress in cost recovery from various services provided by the states.
Even in the case of economic services such as irrigation, power and roads, the cost recovery (ratio of non-tax revenue to non-plan revenue expenditure) through appropriate user charges continues to be low. In the case of roads, for instance, it’s budgeted to decline sharply from 21.5% in 2003-04 to 7.6% in 2007-08. Recovery in the case of power is budgeted to increase 23.6% in 2007-08 from 15.7% in the previous year, though there is no apparent reason for this improvement.
Expenditure management, the other important element of fiscal reform, also requires more attention, at least the qualitative aspect of it. States’ overall expenditure is budgeted to decline to 12.8% of GDP from 13% in the previous year. But expenditure on interest payments, administrative services and pensions are set to increase at a fast pace. The non-development expenditure, therefore, continues to be high.
Though such expenditure is budgeted at 5.3% of GDP in 2007-08 against 5.4% in 2006-07 (RE) and 5.9% average for 2000-05, it is much higher than 4.3% for 1990-95 and could well be more than 5.3% eventually. There is also a risk of a substantial Sixth Pay commission award undoing the progress the states make. Once the Centre decides to hike salaries, states would be also under pressure to set up pay commissions.
ADVERTISEMENT
It is evident that states’ own revenue performance, both tax and non-tax, has to improve to ensure they are in position to absorb the adverse impact of any economic downturn and pay commission awards, and allocate more to capital expenditure to create more and better delivery capacities. For instance, with moderation in stamp duty and property tax rates, states should be able to improve revenue on this count. States such as Delhi have already seen a spurt in property registration after transfer charges were lowered.
In the case non-tax revenue, better service delivery should enable states to levy appropriate user charges and improve cost recovery at least from economic services. Electricity reforms can make a visible dent in states’ finances, as under recovery from electricity is a big cost item for most states. Simple reforms such as distribution metering can help check theft, which as of now is passed off as losses to the farm sector.
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
