The State governments formulated their budgets for 2009-10 against the background of the knock-on
effect of the global financial crisis on the Indian economy. Taking cognizance of uncertain growth prospects, many State governments announced fiscal stimulus packages to sustain the growth momentum. In this
context the fiscal correction and consolidation witnessed in State finances in the recent past provided the
fiscal space for the stimulus. Consequently, the overall Gross Fiscal Deficit (GFD)-GDP ratio is estimated
to increase to 3.2 per cent in 2009-10 (Budget Estimates) from 2.6 per cent in 2008-09 (Revised
Estimates) and 1.5 per cent in 2007-08 (Accounts). As the recovery process sets in, the States need to
return to the path of fiscal consolidation.
1. Introduction
1.1 The period up to 2007-08 witnessed a
considerable improvement in the consolidated fiscal
position of State governments. States were given
incentives by the Twelfth Finance Commission
(TwFC) to implement their own Fiscal Responsibility
Legislation (FRL) in the form of conditional debt
restructuring and interest rate relief. However, the
economic slowdown following the knock-on effect
of the global financial crisis and the accompanying
moderation in the pace of revenue growth adversely
affected the finances of the States in 2008-09.
1.2 This study on ‘State Finances: A Study of
Budgets of 2009-10’1 has been prepared based
on the data available in the budget documents of
28 States governments, and other sources. The
State governments presented their budgets for
2009-102 in an environment marked by an
uncertain growth scenario. It is evident that the
tax revenue buoyancy achieved till 2007-08 could not be realised during 2008-09 (RE). States may
also be under pressure to increase expenditure
to boost demand in the economy. In addition, the
impact of the implementation of the Sixth Central
Pay Commission (CPC)/State Own Pay
Commissions (SPCs) by many State governments
had implications for their revenue expenditure
during 2008-09 (RE) and 2009-10 (BE). In short,
the pace of fiscal correction and consolidation
witnessed during the recent past is likely to suffer
a setback.
1.3 States, while presenting their budgets for
2009-10, seem to have taken into account the likely
impact of a slowdown in their tax collections and
Central transfers. In order to deal with the
slowdown, a few State governments announced
dedicated fiscal stimulus packages in order to boost
demand, while many other States announced
sector specific tax reductions. However, the focus
of the additional expenditure in 2009-10 appears to be through revenue expenditure as reflected in
higher revenue expenditure as a ratio to gross state
domestic product (GSDP) in many States, rather
than capital expenditure. In fact, a majority of the
State governments have budgeted a lower capital
outlay as percentage to GSDP for 2009-10.
1.4 Recognising the need for reviving economic
growth, the Government of India permitted the State
governments to borrow an additional 0.5 per cent of
their GSDP by relaxing the fiscal deficit target under
FRBM from 3.0 per cent to 3.5 per cent in 2008-09
and further to 4 per cent of their GSDP in 2009-10.
In the Union Budget 2009-10, it was announced that
a goods and services tax (GST) would be introduced
by April 1, 2010 after due consultations with all
stakeholders. The implementation of GST is
however, likely to be postponed to a future date. In
order to facilitate the process of a further
convergence of central excise duty rates to a mean
rate (currently 8 per cent), various policy measures
with regard to tax rates were proposed by reviewing
the list of items. The Reserve Bank in its role as
banker, debt manager and monetary authority has
also been taking various initiatives to improve the
financial condition of the State governments. A noncompetitive
bidding facility has been introduced to
State Development Loans (SDLs) since the auction
held on August 25, 2009.
2. Preview
1.5 A noticeable improvement in the finances
of the State governments was discernible as
revised estimates of 2007-08 translated into
accounts. This was reflected in an increase in
revenue surplus, reduction in GFD and primary
deficit turning into surplus. However, the significant
improvement in key deficit indicators of State
governments witnessed till 2007-08 appears to
have abated with the overall macroeconomic
slowdown in 2008-09 and 2009-10.
1.6 The consolidated revenue surplus as
percentage to GDP increased from 0.6 per cent in
2006-07 to 0.9 per cent in 2007-08. Although the
States were able to achieve revenue surplus in
2008-09 (RE) as well, there was a significant decline of 0.7 percentage points in the revenue
surplus-GDP ratio [from 0.9 per cent in 2007-08 to
0.2 per cent in 2008-09 (RE)]. The consolidated
revenue balance of the States, after remaining in
surplus for three consecutive years, is however,
budgeted to turn into deficit (0.5 per cent of GDP) in
2009-10 (BE). Reflecting the deterioration in the
revenue account of State governments, GFD as
percentage to GDP is estimated to be higher at 3.2
per cent in 2009-10 as compared with 2.6 per cent
in 2008-09 (RE) and 1.5 per cent in 2007-08
(Accounts). The increase in GFD in 2009-10 (BE)
would be mainly due to deterioration in the revenue
account coupled with an increase in net lending. The
consolidated capital outlay as a percentage to GDP,
however, is budgeted to decline in 2009-10 by 0.2
percentage points to 2.6 per cent as compared with
2008-09 (RE). The primary surplus generated by
State governments in 2007-08 turned into primary
deficit (0.7 per cent of GDP) in 2008-09 (RE) which
would further increase to 1.3 per cent in 2009-10.
1.7 During 2009-10, deterioration in the
consolidated fiscal position is observed across
majority of the States. Out of the 28 States, 14
States have budgeted a revenue deficit in 2009-10
as compared to 4 States both in 2008-09 (RE) and
2007-08 (Accounts). Revenue account positions
with respect to 10 States are budgeted to turn into
deficit in 2009-10 (BE) from a surplus position in
2008-09 (RE). Further, another nine States have
budgeted a lower revenue surplus as compared
with 2008-09 (RE). In total, the revenue account is
expected to be adversely impacted in the case of
23 States during 2009-10. Similarly, the number of
States with the GFD-GSDP ratio of less than 3.0
per cent decreased from 18 in 2007-08 (Accounts)
to 9 in 2008-09 (RE) and further to 6 in 2009-10
(BE). In short, out of 28 States, 22 States would
not be able to achieve a GFD-GSDP ratio of 3 per
cent in 2009-10 as indicated in their FRLs.
1.8 Given the targets with respect to key deficit
indicators prescribed by the TwFC, it is observed
that at the consolidated level, the States were able
to achieve most of the targets well in advance rather
than in the terminal year i.e., 2009-10. At the
consolidated level, State governments wiped out revenue deficit in 2006-07 and were able to contain
GFD-GDP below 3 per cent in 2005-06. However,
progress came to a halt when the impact of the
overall macroeconomic slowdown and the
implementation of the Sixth CPC/SPCs began to
reflect in State finances in 2008-09. In 2009-10
(BE), the consolidated State finances are likely to
deteriorate further. An analysis of State budgets
shows that with the re-emergence of revenue deficit
after three years and the expansion in GFD to more
than 3.0 per cent of GDP, the States would
apparently not be able to meet the TwFC targets in
the terminal year of 2009-10.
1.9 The outstanding liabilities of State
governments, as a percentage to GDP, showed a
persistent decline from the peak level of 32.8 per
cent in 2003-04 to 26.2 per cent in 2008-09 (RE).
However, due to increasing financing needs, the
debt-GDP ratio is budgeted to be marginally higher
at 26.5 per cent in 2009-10. Likewise, the ratio of
interest payments to revenue receipts of the State
governments, which declined sharply from 26.0 per
cent in 2003-04 to 14.4 per cent in 2008-09 (RE),
is estimated to be marginally higher at 14.5 per cent
in 2009-10 (BE).
1.10 Given the recent setback to State finances,
there are a number of issues that States have to
look into. For instance, the States need to resume
the reform process towards fiscal consolidation in
the coming years. At the same time the States have
to ensure adequate growth enhancing expenditure
so as to counter the downturn in the economy. The
States need to successfully manage the transition
with regard to the implementation of the Sixth CPC/ SPCs. In addition, there are certain structural
issues that continue to remain important for State
finances such as the quality of expenditure and
surplus cash balances of State governments. With
experience gathered through their FRLs, the States
need to plan the next round of reforms and resume
the process of fiscal correction and consolidation
at the earliest.
1.11 The Chapter-wise scheme of the Study is
as follows: Chapter I provides an overview of the
Study. Chapter II highlights major policy initiatives
of State governments, the Government of India and
of the Reserve Bank of India. Chapter III provides
an assessment of the consolidated budgetary
position of the State governments. Chapter IV
brings out the State-wise assessment of their fiscal
performance. Chapter V provides an analysis and
assessment of the outstanding liabilities, including
market borrowings and contingent liabilities of the
State governments. Chapter VI elaborates on the
special theme, i.e., an analysis of the trend and
pattern of expenditure of the States, covering the
period 1980-81 to 2009-10. The major emerging
issues relating to State finances are presented in
Chapter VII. Annex 1 sets out the State-wise major
policy initiatives announced in the State budgets.
The consolidated data on various fiscal indicators
of the twenty-eight State governments are set out
in Appendix Tables 1-23, while State-wise data are
provided in Statements 1-57. The detailed Statewise
budgetary data are provided in Appendices I-IV
(Appendix I - Revenue Receipts, Appendix II -
Revenue Expenditure, Appendix III – Capital
Receipts, Appendix IV - Capital Expenditure).
1 Prepared by the Division of State and Local Finances (DSLF) of the Department of Economic Analysis and Policy (DEAP) with support
from the Division of Central Finances and the Regional Offices of DEAP. Support was also received from the Department of Government
and Bank Accounts (DGBA) and the Internal Debt Management Department (IDMD) of the Reserve Bank. Technical support was
received from the finance departments of the twenty-eight State governments, governments of NCT Delhi and Puducherry; valuable
inputs were also received from the Ministry of Finance, Government of India, Planning Commission and the office of Comptroller and
Auditor General (CAG) of India, New Delhi. All these are thankfully acknowledged.
2 An analysis of the consolidated fiscal position of State governments based on State budgets of twenty-seven (of which two were Vote on
Account) States for 2009-10 has been published in the Reserve Bank of India Annual Report, 2008-09. This Study provides further
details on the consolidated fiscal position of twenty-eight State governments as also a State-wise analysis covering budgetary data as
well as additional information obtained from the State governments and the Government of India. Information with respect to NCT Delhi
and Puducherry is provided additionally as memo item. |