The consolidated fiscal position of the States/Union Territories is budgeted to improve in 2011-12 with a return to
surplus in the revenue account, reduction in fiscal deficit-GDP ratio and declining trend in debt-GDP ratio. This
trend is poised to continue with majority of the States amending their Fiscal Responsibility and Budget
Management Acts which map out graduated reductions in fiscal deficit and debt relative to their GSDPs over the
medium term. An analysis of the Reserve Bank’s contribution to finances of States over the years shows that, apart
from being a banker and debt manager of the States, the Bank has progressively played a greater role since the 1990s
as reflected in the formulation of model responsibility legislation for the States and advices given on fiscal
sustainability issues from time to time. As the States return to rule-based fiscal consolidation, they need to deal with
structural rigidities in their finances, focus on qualitative aspects of the correction process, undertake effective
expenditure management and address issues relating to State Power Utilities including their impact on State
finances.
1. Introduction
1.1 In 2011-12, the States announced their
budgets aimed at resumption of fiscal correction
process. The focus was more on expenditure control
against the backdrop of the rollback of fiscal stimulus
measures and the tapering off of the impact of the
Sixth Pay Commission Award. All States, with the
exception of Goa have amended their Fiscal
Responsibility and Budget Management (FRBM) Acts/
Rules. Under the amended Acts, the State
governments are aiming to eliminate revenue deficits
and to bring about gradual reductions in fiscal deficit
and debt levels latest by 2014-15, as was
recommended by the Thirteenth Finance Commission
(ThFC). While this augurs well for medium-term fiscal
sustainability of the States, the eventual fiscal
outcome would be shaped not only by the
macroeconomic conditions but also by the joint
commitment of the Centre and the States to
implement fiscal reforms in the pipeline. This report on “State Finances: A Study of Budgets of 2011-12”1 has
been prepared based on the data available in the
budget documents of 28 State governments, two
Union Territories with legislature, viz., NCT Delhi and
Puducherry.
2. Preview
1.2 The year 2011-12 is expected to bring an
improvement in fiscal position of the State
governments, as evident from budgeted target of
either a turnaround in their revenue accounts from
deficit to surplus or lower revenue deficits. The
consolidated budgetary position of the States shows a
revenue surplus (0.2 per cent of GDP) in 2011-12 (BE)
after a gap of two years (revenue deficits of 0.5 per
cent and 0.3 per cent of GDP in 2009-10 and 2010-11,
respectively).Consequently, the aggregate fiscal
deficit is budgeted lower at 2.2 per cent of GDP in
2011-12 (2.7 per cent and 2.9 per cent of GDP in 2010-
11 and 2009-10, respectively), though it remains higher than the Thirteenth Finance Commission’s
annual path. This is mainly on account of higher
capital outlay budgeted for 2011-12 while anchoring
the fiscal deficit-GDP ratio below 3 per cent.
1.3 The declining trend in outstanding debt-GDP
ratio, which was visible from end-March 2004 when it
had peaked (32.8 per cent), has continued through
end-March 2011 (RE) (23.5 per cent), and is budgeted
at 22.5 per cent for end-March 2012(BE). The debt-
GDP ratios are lower than the benchmarks for these
years and the medium term target of 24.3 per cent for
2014-15 recommended by the ThFC. This trend is
poised to continue with amended FRBMs of the States
setting out a graduated path of reduction in debt-
GSDP ratios for the respective States. The continued
emphasis on market borrowings for financing gross
fiscal deficit of State governments is reflected in the
shift in composition of the States’ outstanding
liabilities. There was, however, lower recourse to
market borrowings during 2010-11 after the crisis
years of 2008-09 and 2009-10, as the States reverted
to fiscal consolidation path and their cash balances
improved.
1.4 The Reserve Bank has been playing an
important role as banker and debt manager of the
States. Over the years, as a banker, while remaining
sensitive to growing requirements of the State
governments for short-term accommodation amidst
fiscal decentralisation, the Reserve Bank also
ensured short-term fiscal discipline by States,
consistent with its objective of maintaining monetary
stability. As a debt manager, the Reserve Bank’s
management of market borrowings of the States has
sequentially evolved from the traditional practice of
underwriting to administered system of predetermined
notified amounts/coupons before
eventually migrating to a full-fledged auction system.
In the wake of fiscal stress of the States from the late
1990s, the Reserve Bank’s focus expanded beyond its traditional functions as it provided inputs facilitating
the introduction and implementation of rule-based
medium-term fiscal consolidation at the State level.
The Reserve Bank also advised State governments in
framing policies related to fiscal sustainability issues
which emerged from time to time.
1.5 As the States embark upon the second phase
of a rule-based fiscal consolidation path, care needs
to be taken to address the structural rigidities in State
finances, improve disclosures for remaining alert on
qualitative aspects of fiscal correction, move towards
the proposed restructured public expenditure system
for better management of outlays for effective
outcomes, rationalise centrally sponsored schemes
for improving their effectiveness and address issues
relating to financial losses of the State Power
Utilities.
1.6 The Chapter-wise scheme of the report is as
follows. While this Chapter has provided an overview
of the report, the major issues relating to the finances
of the States in the current context are presented in
Chapter II. Chapter III highlights the major policy
initiatives undertaken by the State governments,
Government of India and the Reserve Bank of India.
Chapter IV provides an assessment of the
consolidated budgetary position of the State
governments. Fiscal performance across States is
covered in Chapter V. Chapter VI provides an analysis
and assessment of the debt position of the States,
including market borrowings and contingent liabilities.
Chapter VII focusses on the special theme,i.e., role of
the Reserve Bank in State finances. The consolidated
data on various fiscal indicators of 28 State
governments are covered in Appendix Tables 1-21,
while State-wise data are provided in Statements 1-47.
The detailed State-wise budgetary data are provided
in Appendix I-IV (Appendix I : Revenue Receipts,
Appendix II : Revenue Expenditure, Appendix III :
Capital Receipts, Appendix IV : Capital Expenditure).
|