State governments are expected to strengthen their fiscal position in 2012-13, broadly in line with the fiscal
roadmap laid down by the Thirteenth Finance Commission. The improvement is reflected in the continued
increase in surpluses in the revenue account of the majority of states, reduction in the fiscal deficit-GDP ratio
and a declining trend in the debt-GDP ratio. The higher capital outlay budgeted for the year in many of
the revenue surplus states indicates that the quality of expenditure is not being compromised in attaining the
deficit targets. While some comfort can be drawn from the fiscal position of the state governments, states may
have to exploit their potential for raising revenues and move towards convergence of tax rates in preparation
for the shift to the goods and services tax regime. The states, particularly those that fare poorly in terms of the
human development index, need to increase their social sector expenditure in building human capital stock
that, in turn, would help augment the supply of skilled labour and achieve more inclusive growth in future.
There is also a need to improve the measurement and reporting of implicit obligations of the states to reflect their
true fiscal positions, particularly in light of increasing off-budget liabilities on account of guarantees to state
power distribution companies (discoms). As regards state debt sustainability, prudent expenditure management
measures, which contain non-productive expenditure while simultaneously providing for counter-cyclical growth
inducing expenditure, may be required to maintain and strengthen debt sustainability.
1. Introduction
1.1 After a marginal setback in 2011-12 due to
the economic slowdown, the overallfiscal balance
of the states is budgeted to improve in 2012-13,
as reflected in the reduction in gross fiscal deficit
(GFD) and primary deficit (PD) as ratios to GSDP
and increase in capital outlay in the majority of
the states. The higher growth in revenue receipts
than in revenue expenditure during 2012-13 is
expected to boost the revenue surplus of states
at the consolidated level. States have sought to
augment their revenues through tax and nontax
measures even while continuing to address
the issue of inflation in essential commodities
through exemption/reduction in value added tax
(VAT) rates on specific commodities. States are
also increasingly taking recourse to information
technology to improve tax compliance and reduce
the costs of tax administration. The eventual
fiscal outcome would, however, be shaped by
the macroeconomic conditions and the joint
commitment of the centre and the states to implement fiscal reforms that are in the pipeline.
This report, “State Finances: A Study of Budgets
of 2012-13”, has been prepared based on the
data available in the budget documents of 28
state governments and two Union Territories with
legislature, viz., NCT Delhi and Puducherry.
2. Preview
1.2 All the key deficit indicators of states at the
consolidated level are budgeted to improve in
2012-13, indicative of the states’ intent to carry
forward fiscal consolidation as envisaged by the
Thirteenth Finance Commission (FC-XIII). While
the consolidated revenue surplus is budgeted to
increase to 0.4 per cent of GDP in 2012-13 from
0.1 per cent in 2011-12(RE), GFD and PD as
ratios to GDP are budgeted to decline to 2.1 per
cent and 0.6 per cent, respectively, in 2012-13
from 2.3 percent and 0.8 per cent, respectively,
in 2011-12(RE). At the disaggregated level,
the GFD-GSDP ratio is budgeted to exceed the
FC-XIII’s target in 2012-13 in one non-special category state (NSC) and two special category
(SC) states.
1.3 The consolidated state government debt-GDP
ratio, which has been secularly declining since
end-March 2004, continued to do so in end-March
2012 (RE) to 22.6 per cent and is budgeted to
further decline to 21.9 per cent by end-March
2013. At this level, the debt-GDP ratio is lower
than the FC-XIII’s recommended benchmark for
the year as well as the medium-term target of 24.3
per cent for 2014-15. The decline in the debt-GDP
ratio was also seen at the disaggregated level of
the states, refl ecting the impact of a faster increase
in nominal GSDP relative to that of the state debt.
Market borrowings continued to dominate the
outstanding liabilities of the states indicating a
significant compositional shift in favour of market
borrowing. The weighted average yield of state
government securities issued during 2011-12 was
higher than in the previous year, due to increased
market borrowings coupled with tight liquidity in
the market. On the cash management front, states
continued to accumulate surplus cash balances
while they reduced their recourse to WMA and
overdrafts in 2011-12 over the previous year. The
recently-announced scheme for fi nancial
restructuring of the state-owned distribution
companies (discoms) is likely to increase the
contingent liabilities of the state governments in
the near term and may have an impact on their
actual liabilities in the medium-term.
1.4 The sustainability of sub-national debt
assumed importance during the late 1990s and
early 2000s when state governments experienced
fiscal stress and debt repayment pressures. The
reversal of the interest rate cycle in the mid-2000s
and the incentivised debt relief and interest relief
measures provided by the centre played a crucial
role in alleviating the interest and debt burden,
preventing an explosive trajectory for the debt of
the state governments. This was complemented by efforts at fiscal consolidation and institutional
reforms to get on the fiscal correction path. An
indicator analysis for states shows progress on
most indicators of fiscal and debt sustainability
since the onset offiscal and debt consolidation.
While the consolidated debt-GDP ratio of the
states has significantly declined in recent years,
contingent liabilities arising from guarantees to
state public sector utilities pose a risk to state
finances, unless monitored and adequately
controlled. Moreover, the aggregate picture
masks interstate disparities and vulnerabilities,
which require customised reforms and corrective
packages rather than a uniform across-the-board
prescription. Going forward, given that restructuring
of most high-cost debt of the states have already
been undertaken and there is limitedfiscal space
available with the centre, substantial debt relief
and interest relief measures from the centre may
not be forthcoming. Hence, states would have
to focus more on their own revenue enhancing
and expenditure compression measures to
improve their debt sustainability. Further, as
tax revenue is more sensitive to growth cycles,
prudent expenditure management measures,
which contain non-productive expenditure while
simultaneously providing for counter-cyclical
growth inducing expenditure, may be required to
maintain and strengthen debt sustainability.
1.5 With the second phase of a rule-based
fiscal consolidation path underway, some of the
key challenges that need to be addressed by
the state governments are improvement in tax
efforts through increasing efficiency and other
initiatives; reorientation of expenditure policies
to improve the quality of expenditure while also
aiming at fiscal sustainability in the medium term;
enhancement offiscal transparency so
as to enable effective monitoring of the quality,
durability and effectiveness of the fiscal correction
process; factoring in the fiscal implications of the
financial restructuring package for state discoms; and strengthening the supply chain through
legislative interventions and building appropriate
infrastructure.
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 highlighted in Chapter II. Major policy
initiatives undertaken by the state governments,
the Government of India and the Reserve Bank
of India are presented in Chapter III. Chapter IV
provides an analysis of the fiscal position at the
consolidated level and the underlying state-wise
contribution. It also provides an assessment
of fiscal performance vis-à-vis the revised roadmap of the Thirteenth Finance Commission.
Chapter V presents an analysis and assessment
of the debt position of the states, including market
borrowings and contingent liabilities. Chapter VI
focuses on the special theme, i.e., Sub-national
Debt Sustainability: An Assessment of the State
Governments. The consolidated data on various
fiscal indicators of 28 state governments are
covered in Appendix Tables 1-21, while statewise
data are provided in Statements 1-47. The
detailed state-wise budgetary data are provided in
Appendices I-IV (Appendix I: Revenue Receipts;
Appendix II: Revenue Expenditure; Appendix
III: Capital Receipts; Appendix IV: Capital
Expenditure).
|