Annual Report

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Date : Aug 28, 2000

IV Government Finances

Central Government Finances

State Governments Finances

Combined Budgetary Position of the Centre And States

Domestic Public Debt

4.1	During 1999-2000, fiscal management in the economy continued to be constrained by high
fiscal deficits of both the Central and State Governments. Central Government finances came under pressure from both revenue shortfall and expenditure overrun, while State Government finances turned sharply adverse in order to meet the recurrent expenditure requirements mainly on account of recent pay revisions. The large market borrowing by the Central Government, above the budgeted level, on account of the rise in fiscal deficit posed a severe challenge. The Reserve Bank had to face the dilemmas in managing debt and monetary management operations to ensure an appropriate interest rate environment in the economy, keeping in view the incipient industrial recovery. The government bond market remained relatively stable with the yield curve moving down during the year and the maturity profile of government debt was considerably lengthened.

CENTRAL GOVERNMENT FINANCES:
1999-2000

4.2	The stress in the finances of the Central Government during 1999-2000 was partly due to
unanticipated expenditures on account of national defence, the unprecedented cyclone in Orissa, the residual impact of the Fifth Pay Commission along with the provision of special fiscal assistance to States in the light of the Eleventh Finance Commission's recommendations. The overall expenditure (revised estimates), as a result, exceeded the budget estimates by 7.0 per cent. There was also a significant shortfall in tax collections and divestment proceeds. Revenue receipts in 1999-2000 fell short of the budgeted target by 1.8 per cent. Consequently, almost all the major deficit indicators such as the gross fiscal deficit, revenue deficit and primary deficit of the Central Government exceeded the budget estimates by a significant margin (Chart IV.1). The gross fiscal deficit¹ (GFD) increased to Rs.1,08,898 crore (5.6 per cent of GDP) in the revised estimates, as against the budget estimate of Rs.79,955 crore (4.0 per cent of GDP) (Appendix Table IV.1). The revenue deficit at Rs.73,532 crore (3.8 per cent of GDP) exceeded the budget estimate by Rs.19,385 crore and formed almost two-thirds of the gross fiscal deficit. The primary balance recorded a deficit of 0.9 per cent of GDP in contrast to the projected surplus of 0.4 per cent of GDP in the budget estimates.



4.3	During 1999-2000, the net market borrowing of the Central Government
(including 364-day Treasury Bills) at Rs.73,077 crore exceeded the budgetary projections by Rs.15,616 crore (27.2 per cent). The gross market borrowing of the Central Government amounted to Rs.99,630 crore in 1999-2000 as against Rs.93,953 crore in 1998-99 (Appendix Table IV.9). The Reserve Bank's support to the market borrowing programme by way of private placements/devolvements of dated securities and devolvement of 364-day Treasury bills at Rs.29,267 crore in 1999-2000 was lower than Rs.39,777 crore in 1998-99. The initial subscription was offloaded through net open market sales amounting to Rs.30,861 crore. The Reserve Bank's initial subscription was high in the first quarter and subsequently declined by the fourth quarter of 1999-2000 (Table 4.1 and Chart IV.2).

Table 4.1: RBI's Initial Subscription to Borrowings of Central Government

									(Rupees crore)
Quarters	Subscription to Treasury Bills					Sub-	Total	OMO	OMO	Net RBI
	14-day	91-day	182-day	364-day	Total	scrip-	initial	pur-	sales	credit to
						tion to	subscription	chases		Central
						dated	to Borro-			Govern-
						secu-	wing of			ment * ⁺
						rities	Central
							Govern-
							ment (6+7)
1	2	3	4	5	6	7	8	9	10	11
1997-98
First Quarter	0	169	-	0	169	5,884	6,053	0	1,956	4,038
(April-June)
Second Quarter	0	50	-	0	50	1,143	1,193	0	107	-7,731
(July-September)
Third Quarter	0	244	-	0	244	0	244	467	1,530	7,192
(October-December)
Fourth Quarter	0	627	-	0	627	6,000	6,627	0	4,488	12,914
(January-March)

1998-99
First Quarter	74	245	-	347	666	14,000	14,666	0	262	15,162
(April-June)						(10,000)
Second Quarter	2,190	2,200	-	615	5,005	4,205	9,210	0	9,033	1,856
(July-September)						(0)
Third Quarter	331	345	-	30	706	12,000	12,706	0	9,080	13,663
(October-December)						(12,000)
Fourth Quarter	209	224	-	580	1,013	8,000	9,013	0	11,294	11,800
(January-March)						(8,000)

1999-2000
First Quarter	185	281	0	275	741	21,000	21,741	0	18,637	8,205#
(April-June)						(21,000)
Second Quarter	421	481	290	1,417	2,609	2,500	5,109	50	7,193	3,510
(July-September)						(2,500)
Third Quarter	183	473	154	575	1,385	3,500	4,885	2,141	3,567	7,572
(October-December)						(3,500)

Fourth Quarter	346	288	201	0	835	0	835	4,754	8,409	-5,587
(January-March)						(0)^

2000-01
First Quarter	339	449	150	1,000	1,938	6,961	8,899	5	2,030	14,412
(April-June)

-	Not applicable.	# upto June 18, 1999.
*	Variation over the end-March position.
+	Column 8, 9 and 10 will not add up to variation in net RBI credit to the Central Government (Col.11) which is the sum of change in the RBI's holdings of Government of India dated securities, Treasury Bills and rupee coins and loans and advances from the Reserve Bank to the Centre, adjusted for changes in the Centre's cash balances with the Reserve Bank.

Note: The figures in brackets refer to private placements with the Reserve Bank.

4.4	The net Reserve Bank credit to the Central Government moved in a totally different
direction from that of the fiscal deficit. The net Reserve Bank credit to the Central Government, after closure of accounts, declined by Rs.5,587 crore during 1999-2000, recording a surplus for the first time since 1977-78. Throughout 1999-2000, the net Reserve Bank credit to the Centre remained well below that of 1998-99, except in April and September 1999. The agreed limits of Ways and Means Advances (WMA) for the first and second halves of 1999-2000 remained the same as in the previous year, i.e., Rs.11,000 crore (April-September) and Rs.7,000 crore (October-March), respectively. The average utilisation of WMA came down from Rs.7,318 crore in the first quarter to Rs.4,225 crore in the second quarter, rose to Rs.5,818 crore in the third quarter and moved down to Rs.3,414 crore in the fourth quarter. The year-end outstanding WMA was placed at Rs.982 crore as against Rs.3,042 crore as on March 31, 1999 (Table 4.2). During the fiscal year, the Government took recourse to overdraft on a few occasions up to a maximum of seven consecutive working days and the maximum amount of overdraft was Rs.3,582 crore.

4.5	Revenue expenditure at Rs.2,53,036 crore was higher by Rs.16,049 crore than the budget
estimates, accounting for nearly 81 per cent of increase in total expenditure. Expenditure pressures emanated mainly from increase in interest payments (Rs.3,425 crore), defence (Rs.2,409 crore), pensions (Rs.4,173 crore) and short-term assistance (provisions for extended WMA) to States (Rs.3,000 crore). Direct capital outlay of the Central Government at Rs.25,184 crore in the revised estimates was higher by 3 per cent, with a large part of it incurred on defence. Non-defence capital outlay rose by 3.1 per cent over the budget estimates. However, the Annual Plan outlay in the revised estimates, at Rs.96,310 crore, fell short of the budget estimates by Rs.7,211 crore. The cut back in the Plan outlay was necessitated mainly due to fall in the contribution of internal and extra budgetary resources of public sector enterprises (Rs.6,872 crore).



4.6	The shortfall in the Annual Plan outlay during 1999-2000 reflects the structural constraint
posed by the growing non-Plan expenditure. Interest payments formed the largest component of government expenditure accounting for 40.8 per cent of non-Plan expenditure. This share has gone up from 23.7 per cent in the 1980s to 36.3 per cent in the 1990s. The non-interest, non-Plan expenditure, on the other hand, grew by a lower order of 12.6 per cent in the 1990s as compared with 19.4 per cent in the 1980s.

Table 4.2: Loans and Advances and Net RBI Credit to the Centre^@

					(Rupees crore)
Period	Loans and Advances from RBI*			Net RBI Credit to Centre
	2000-2001	1999-2000	1998-99	2000- 2001	1999-2000	1998-99
1	2	3	4	5	6	7
Quarterly Average
First Quarter (April-June)	9,137	7,318	9,411	8,434	8,349	6,121
Second Quarter (July-September)	8,143 #	4,225	4,134	18,792#	7,398	11,543
Third Quarter (October-December)		5,818	3,325		7,859	14,471
Fourth Quarter (January-March)		3,414	4,797		2,536	17,985
Fiscal Year Average ^$		5,025	5,204		6,034	12,668
End-March		982	3,042		-5,587	11,800

@ As per RBI records.

# Up to August 11, 2000.

(-) Indicates surplus.

*	Represents outstanding Ways and Means Advances from RBI. The limits on WMA for the first half (April-September) and for the second half (October-March) are Rs.11,000 crore and Rs.7,000 crore, respectively.
$	Average of all fortnightly reporting Friday figures and the end-March figures, after the closure of Government accounts

4.7	Revenue receipts during 1999-2000 at Rs.1,79,504 crore in the revised estimates were
lower by Rs.3,336 crore than the budget estimates. This was mainly due to fall in the tax revenue, while non-tax revenue recorded modest growth. The tax-GDP ratio of Centre (gross) was projected at 8.8 per cent in the budget estimates while the realisation as per revised estimates stood at 8.7 per cent as against 8.2 per cent in 1998-99. Revenue collection from customs and excise duties turned out to be below the budget projection. It was attributed to very low growth in the dollar value of non-oil imports and partly due to lower taxable value of excisable items, and lower excise rates on such items. In respect of taxes on income other than corporation tax (net to Centre), collections improved from Rs.9,923 crore in the budget estimates to Rs.10,132 crore in the revised estimates, almost double that of Rs.5,755 crore during 1998-99. On the other hand, corporation tax at Rs.29,915 crore, showed a decline of Rs.935 crore in 1999-2000 over Rs.30,850 crore in the budget estimates.

4.8	There was a decline in the overall tax buoyancy in the 1990s as compared with the 1980s.
The fall in the overall tax buoyancy is on account of a sharp decline in the indirect tax buoyancy from 1.15 in the 1980s to 0.83 in the 1990s, partly reflecting a progressive reduction in the import duty rates and rationalisation of excise duty structure, as part of the tax reform programme. Though the buoyancy in direct taxes improved, it did not translate itself into a rise in the overall tax buoyancy as the proportion of direct tax revenue in the total tax revenue was small. A sustained decline in tax buoyancy implies that the taxable base is rising at a disproportionately lower rate than the growth in GDP. It would, if unaccompanied by a commensurate adjustment in expenditure, tend to push up Government borrowings and the level of public debt, perhaps at a higher rate than the growth in GDP.

4.9	During 1999-2000, the problem of resource mobilisation was exacerbated by a large
shortfall in the proceeds from disinvestment. Compared to the estimate of Rs.10,000 crore, the actual realisation was Rs.2,600 crore. The net market borrowings at Rs.77,065 crore exceeded the budget estimates by Rs. 19,604 crore and accounted for 71.0 per cent of GFD. Other liabilities (small savings, provident funds, etc.) and external assistance financed the remaining gap (Appendix Table IV.4).

Central Government Budget : 2000-01

4.10	The budget for 2000-01, formulated against the backdrop of a large slippage in the fiscal
position, accorded high priority to curbing expenditure growth and bringing about structural changes in the composition of expenditure. Both the revenue deficit and fiscal deficit are budgeted to be brought down to 3.6 per cent and 5.1 per cent of GDP, respectively, from 3.8 per cent and 5.6 per cent in 1999-2000 (revised estimates). The primary deficit is also budgeted lower at 0.5 per cent of GDP than 0.9 per cent in the previous year. The medium-term strategy underlying the budget is to place the economy on a high growth path of 7 to 8 per cent with a view to reducing poverty significantly within the next decade. Towards these objectives, the budget has adopted a seven-fold strategy: viz., strengthening the foundations of the rural economy, developing knowledge based industries, strengthening and modernising traditional industries, removing infrastructure bottlenecks, according high priority to human resource development with special emphasis on the poorest and weakest sections of the society, strengthening the country's role in the world economy through rapid growth of exports, higher foreign investment and prudent debt management, and establishment of a credible framework for fiscal discipline.

4.11	The focus of fiscal reform underlying the budget is on further strengthening expenditure
management, restructuring public sector enterprises and strengthening tax reforms through restructuring and rationalisation of both direct and indirect taxes. The measures proposed in the budget towards expenditure management include scrutiny of the existing schemes using zero based budgeting technique, limiting the creation of jobs and fresh recruitment in the Government to minimum essential needs, redeployment of surplus staff and introduction of voluntary retirement scheme (VRS), adopting cost-based user charges to reduce subsidies wherever feasible and earmarking a portion of the disinvestment proceeds for debt redemption. For medium-term management of the fiscal deficit, the budget has proposed to introduce an institutional mechanism in the nature of a Fiscal Responsibility Act. The main elements of Government policy towards the public sector would be to restructure and revive potentially viable public sector units (PSUs) and close down the unviable/sick PSUs. The Government has proposed to raise resources from the market against the security of assets of the closed PSUs and use these funds to provide adequate safety net for workers. A fresh impetus to the programme of disinvestment and privatisation of PSUs is also proposed.

4.12	The tax measures proposed in the budget rest on the principles of stability, economic
growth, rationalisation and simplification to strengthen the ongoing reform process. On the indirect tax front, the budget proposes to introduce a single rate Central Value Added Tax (CENVAT). The existing three ad-valorem rates of basic excise duty, viz., 8, 16 and 24 per cent would, accordingly, converge into a single rate of 16 per cent CENVAT with MODVAT benefits. In addition to 16 per cent CENVAT, the budget also proposes three rates of special excise duties viz., 8, 16 and 24 per cent, which will not be generally modvatable. The rate structure of custom duties is further rationalised by reducing the number of custom duties rates from 5 to 4, with the tax rate structure consisting of 35 per cent, 25 per cent, 15 per cent and 5 per cent. The peak rate of basic custom duties is reduced from 40 to 35 per cent.

4.13	In the sphere of direct taxes, the measures initiated are more towards rationalisation and
simplification. The existing tax rates of personal income tax have been retained while the surcharge has been increased to 15 per cent for non-corporate tax payers having total taxable income above Rs.1,50,000 per year mainly for revenue considerations. The important steps towards rationalisation of direct taxes include the enhancement of the rate of tax on dividends distributed by domestic companies from 10 per cent to 20 per cent, raising of tax rates on income distributed by debt oriented Mutual Funds and UTI from 10 per cent to 20 per cent, withdrawal of interest tax of 2 per cent borne by banks and financial institutions and the proposal for phasing out income tax exemptions scheme available to export earners over a period of 5 years. To begin with, income tax exemptions available to exporters under the relevant legal provisions would be phased out over a period of five years - 20.0 per cent in each year - starting with 2000-01 followed by a phase-wise reduction of 20 per cent in every subsequent year till they reach zero level. The one-by-six scheme introduced for better tax compliance has been further extended from the existing 54 cities to an additional 79 cities. In order to induce growth in some preferred sectors, the budget also provides for certain sector-specific concessions. These measures include the continuation of special tax benefits on investment in the housing sector granted during the previous budget for two more years, the special tax treatment to Venture Capital Funds by way of application of 'pass through' principle and the full exemption on income from Investor Protection Funds with Stock Exchanges.

4.14	Revenue receipts for 2000-01 estimated at Rs.2,03,673 crore show a rise of Rs.24,169
crore (13.5 per cent) over the revised estimates for 1999-2000. Of the incremental revenue receipts, about 82 per cent will be contributed by taxes (Rs.19,740 crore) and the remaining through non-tax revenue (Rs.4,429 crore). The gross tax revenue estimated at Rs.2,00,288 crore in 2000-01 is higher by 17.8 per cent than that of Rs.1,69,979 crore in 1999-2000. This includes additional resource mobilisation of Rs.6,904 crore expected mainly from corporation tax (Rs.5,000 crore), union excise duties (Rs.1,433 crore) and income tax (Rs.880 crore). The tax-GDP ratio is accordingly expected to improve to 9.2 per cent in 2000-01 from 8.7 per cent in 1999-2000. Non-tax receipts are estimated to increase by Rs.4,429 crore (8.4 per cent) to Rs.57,464 crore. Major components of non-tax receipts showing an increase over the revised estimates for 1999-2000 are interest receipts (Rs.2,577 crore), dividends and profits (Rs.1,893 crore) and the net profit transfer from the Reserve Bank (Rs.1,700 crore). Capital receipts estimated at Rs.1,34,814 crore would show a rise of Rs.10,580 crore (8.5 per cent) over the revised estimates of 1999-2000 (Rs.1,24,234 crore). Receipts from disinvestment are estimated to increase by Rs.7,400 crore over the revised estimates for 1999-2000.

4.15	Total expenditure during 2000-01 has been proposed at Rs.3,38,487 crore showing an
increase of 11.4 per cent which is higher than 8.7 per cent recorded in 1999-2000 but lower than the average rate of 16.1 per cent during 1991-92 to 1998-99. Aggregate expenditure as a percentage to GDP is estimated at 15.5 per cent in 2000-01, close to that of 15.6 per cent in 1999-2000. The revenue expenditure budgeted at Rs.2,81,098 crore would show a rise of Rs.28,062 crore over the previous year. Within the revenue expenditure, the non-Plan expenditure, estimated at Rs.2,28,768 crore, would account for 81.4 per cent. The major non-Plan revenue expenditures which show high increases are interest payments (Rs.9,841 crore), defence expenditure (Rs.4,788 crore) and non-Plan grants to States/UTs (Rs.11,094 crore) (Appendix Table IV.2). Taken together, these three major heads account for nearly 70 per cent of total non-Plan revenue expenditure and absorb about 78 per cent of revenue receipts. Interest payments would pre-empt 49.7 per cent of revenue receipts in 2000-01 as against 50.9 per cent in 1999-2000 and 46.6 per cent during 1991-92 to 1998-99. Major and minor subsidies together at Rs.22,800 crore in 2000-01 would show a decline of Rs.2,892 crore, mainly due to reduction in food and fertiliser subsidies. Capital expenditures are estimated to grow by 13.2 per cent in 2000-01 as against a decline of 18.2 per cent in 1999-2000. Within the capital expenditure, the capital outlay is budgeted to increase by 30.7 per cent, while loans and advances would fall by 4.1 per cent. A large part of the capital outlay (54.5 per cent) would be accounted for by defence which at Rs.17,926 crore would rise by 41.9 per cent in 2000-01 compared with 25.9 per cent in 1999-2000. Total defence expenditure, proposed at Rs.58,587 crore shows a rise of 20.8 per cent in 2000-01 constituting 2.7 per cent of GDP as compared with 2.5 per cent in 1999-2000.

4.16	The total Central Plan outlay at Rs.1,17,334 crore for 2000-01, shows an increase of 21.8
per cent over the revised outlay of Rs.96,310 crore in 1999-2000. In terms of sectoral allocation, infrastructure sectors have been accorded the highest priority, with the share of energy being pegged at 25.4 per cent, communications at 16.6 per cent, social services at 17.5 per cent and transport at 17.9 per cent.

4.17	The budget has placed the gross fiscal deficit at Rs.1,11,275 crore in 2000-01 as against
Rs.1,08,898 crore in 1999-2000. Of this, borrowing from the market (comprising normal, short-term, medium and long-term borrowings) net of repayment is proposed at Rs.76,383 crore which is marginally lower by Rs.682 crore (0.9 per cent) than that in the revised estimates of 1999-2000. The share of market borrowings in the gross fiscal deficit of the Central Government is budgeted to decline to 68.6 per cent in 2000-01 from 70.8 per cent in 1999-2000. The contribution of other liabilities would rise from 25.2 per cent to 31.4 per cent in 2000-01.

STATE GOVERNMENT FINANCES²

Budgetary Operations of the State Governments: 1999-2000 and 2000-01

4.18	The revised estimates available for twenty-four States for 1999-2000 reveal significant
stress in State finances. The consolidated fiscal deficit of States in the revised estimates for 1999-2000 stood at 4.8 per cent of GDP, representing an increase of 0.9 percentage point over the budget estimates and 0.6 percentage point over that of 4.2 per cent in the accounts of 1998-99 (Chart IV.3 and Appendix Table IV.5).

4.19	The slippage of 0.9 percentage point in GFD was on account of mainly expenditure
overruns (0.7 percentage point) exacerbated by revenue shortfall (0.2 percentage point). The revenue deficit for 1999-2000 overshot its projected level by 42.0 per cent to Rs.56,815 crore (2.9 per cent of GDP) accounting for almost 92 per cent of the rise in GFD. The primary deficit at Rs.49,110 crore (2.5 per cent of GDP) suffered a serious deterioration from the budgeted level of Rs.31,658 crore (1.6 per cent of GDP) in 1999-2000.

4.20	A major aspect of the fiscal imbalance is the mounting pressure arising out of higher
expenditure obligations in relation to the resource raising capabilities. This is reflected in a sharp deviation between the actual expenditure vis-a-vis the budget projections. For instance, during 1999-2000, revenue expenditure overshot the budget estimates by 4.8 per cent while revenue receipts fell short by 2.0 per cent from the budget estimates. The principal components which triggered the expenditure overrun were miscellenous general services (55.8 per cent), interest on market loans (38.9 per cent), additional expenditure on natural calamities (80.3 per cent) and compensation and assignments to local bodies (34.4 per cent). The consolidated revenue expenditure of twenty-four States showed a growth of 23.4 per cent in 1999-2000 over the previous year. The major component which has contributed to the excessive growth in revenue expenditures has been non-Plan expenditure. This segment of expenditure which mainly comprises wages and salaries, pensions and interest payments constitutes around 82.0 per cent of revenue expenditure and absorbs a major portion of revenue receipts causing a persistent rise in the fiscal deficit (Chart IV.4).



4.21	In their budgets for 2000-01, several States have proposed policies towards expenditure
compression and downsizing of Government and resource augmentation to contain the deficits. Accordingly, both the revenue deficit and fiscal deficit are budgeted lower at 2.0 per cent and 3.9 per cent of GDP, respectively, than 2.9 per cent and 4.8 per cent in 1999-2000 (revised estimates). Thirteen States have proposed Additional Resource Mobilisation (ARM) measures to yield Rs.2,424 crore through fresh tax and non-tax measures. Revenue receipts during 2000-01, inclusive of ARM, are budgeted to rise by 13.1 per cent as against 21.9 per cent in 1999-2000. As the States are moving towards reforms in domestic trade taxes, there is a possibility of some initial loss of revenues due to introduction of VAT and rationalisation of other taxes. In view of this, the States' tax receipts are budgeted to show a marginal deceleration to 18.1 per cent from 18.7 per cent in the previous year. However, the States' share in Central taxes is expected to be higher by 13.7 per cent in 2000-01 than that of 12.7 per cent in the previous year on account of the interim award of the Eleventh Finance Commission.³

4.22	On the expenditure front, given its committed nature, the non-developmental expenditures
would rise by 13.5 per cent in 2000-01 on top of the rise of 27.4 per cent in 1999-2000 and would account for 36.0 per cent of the budgeted aggregate disbursements. These expenditures comprise committed items like interest payments, administrative expenditures and pensions. The rising interest burden and pension outgo would pre-empt 32.2 per cent of revenue receipts in 2000-01, as compared with 31.7 per cent in 1999-2000. Concomitantly, developmental expenditures are budgeted to decelerate to 2.4 per cent in 2000-01, as compared with the previous year's growth of 20.5 per cent. This would result in reduced flow of resources towards States' capital outlays and social sectors. The proportion of overall borrowings being utilised on the capital outlay has been budgeted at 38.5 per cent in 2000-01, as compared with 29.8 per cent in 1999-2000, significantly lower than 47.7 per cent during the 1990s. The share of social and economic expenditures in total disbursements has declined from 65.7 per cent, on an average, during the 1990s, up to 1998-99, to 59.3 per cent in 1999-2000 and is budgeted to decline further to 58.3 per cent in 2000-01.



4.23	Notwithstanding the States' efforts in containing the revenue deficit and fiscal deficit
during 2000-01, the budgeted size of the overall resource gap (Rs.85,971 crore against Rs.94,383 crore in 1999-2000) remains high. The revenue deficit is projected to absorb 51.1 per cent of the resource gap in 2000-01. On the financing front, the States depend to a large extent on loans from the Centre. The net loans from the Centre are projected to finance 48.2 per cent of the GFD during 2000-01 as compared with 42.2 per cent in the previous year (Chart IV.5 and Appendix Table IV.8). Besides the net loans, the States have been taking larger recourse to 'other liabilities' in financing the growing expenditures. These liabilities mainly comprising provident funds and small savings, have risen from Rs.6,253 crore in 1990-91 to Rs.44,669 crore in 1999-2000. These are budgeted lower at Rs.34,621 crore in 2000-01. The net receipts from provident fund and small savings have risen from Rs.3,069 crore in 1990-91 to Rs.17,117 crore in 1999-2000, and are budgeted lower at Rs.14,599 crore in 2000-01.

4.24	In this context, it is important that the resources accruing to the public accounts are
invested in a manner that is consistent with the objectives of capital preservation, risk minimisation and return maximisation. The State Governments are encouraged to access the market up to a maximum of 35 per cent (with a minimum of 5 per cent) of their allocated borrowings and are accorded the flexibility with regard to the timing and maturity. The rates at which a State would raise finances from the market would, in the event, depend on the perception of the participants especially the institutional investors, regarding the relative financial strength of individual States.



4.25	The States have recognised the macroeconomic implications of the fiscal problem and
some of them have in fact taken several policy initiatives to stabilise their finances. These measures, inter alia, include the setting up of Consolidated Sinking Fund for retiring public debt, the setting of ceiling on guarantees to place a cap on contingent liabilities and the establishment of guarantee redemption funds. The States of Assam, Karnataka and Maharashtra have recently presented White Papers detailing the fiscal health of the States in 2000. The States of Andhra Pradesh, Arunachal Pradesh, Goa, Maharashtra, Mizoram, Nagaland and West Bengal have taken initiatives for setting up of Consolidated Sinking Funds to help retire debt repayments. The States of Gujarat and Karnataka have prescribed limits on guarantees, while Rajasthan has proposed the setting up of a Guarantee Redemption Fund. As an important budgetary measure, States have begun to focus on expenditure management through setting up of expenditure reforms committees. Some States have adopted decentralisation as the main policy plank through which expenditure moderation would be achieved. Several States have initiated measures for reduction in non-merit subsidies, through better targeting and revision of user charges. On the resource mobilisation front, States have set the stage for introducing VAT through an agreement to impose uniform level of sales tax. It is important to note that the financial health and management of State level public sector undertakings have been a cause for concern. To address this issue, Maharashtra has proposed to set up a Board for Financial and Managerial Restructuring. Finally, to enhance transparency in their budgetary practices, several States have published summary critical fiscal indicators in their budgets for 2000-01 along the lines of the document entitled 'Budget at a Glance' presented by the Centre.

Ways and Means Advances

4.26	The Ways and Means Advances (WMA) are extended by the Reserve Bank to alleviate
any temporary mismatches between receipts and payments of the State Governments. Any amount drawn in excess of WMA is an overdraft. The fiscal stress experienced by the State Governments has had an impact on their liquidity management, leading to higher and frequent recourse to WMA and overdrafts. Recognising their difficulties, the Reserve Bank had enhanced with effect from March 1, 1999 the limits of WMA by Rs.1,450.6 crore to Rs.3,685.0 crore from Rs.2,234.4 crore. Notwithstanding this enhancement, the State Governments continued to frequently resort to WMA and overdrafts, thereby indicating that they remained under stress during 1999-2000 (Chart IV.6). The aggregate outstanding level of WMA and overdrafts of States from the Reserve Bank, as a result, was placed higher at Rs.7,519 crore (including overdraft of Rs.4,093 crore) as on March 31, 2000 than that of Rs.4,818 crore (including overdraft of Rs.2,931 crore) in the corresponding period of the previous year. During 1999-2000, nineteen State Governments resorted to overdrafts as against sixteen in 1998-99. Two State Governments could not clear their overdrafts with the Reserve Bank within the stipulated time limit and consequently the Reserve Bank had to stop payments on their behalf.

4.27	As on June 30, 2000, the aggregate outstanding WMA of the State Governments amounted
to Rs.2,387 crore, including overdraft amounting to Rs.78 crore as compared with the aggregate outstanding WMA of Rs.2,972 crore, including the overdraft of Rs.306 crore as on June 30, 1999. During fiscal 2000-01 (up to June 30, 2000) eighteen State Governments resorted to overdrafts with the Reserve Bank and two State Governments could not clear their overdrafts with the Reserve Bank, and payments on their behalf had to be suspended.



COMBINED BUDGETARY POSITION OF THE CENTRE AND STATES

4.28	The combined gross fiscal deficit of Centre and States increased to 9.9 per cent of GDP
(Rs.1,93,471 crore) during 1999-2000 as against the budget estimate of 7.4 per cent of GDP (Rs.1,48,581 crore), and 8.9 per cent of GDP (Rs. 1,56,928 crore) in 1998-99. The combined revenue deficit rose sharply to a peak of 6.7 per cent of GDP in 1999-2000, accounting for 67 per cent of GFD. The gross primary deficit of the Government sector deteriorated from 3.7 per cent of GDP in 1998-99 to 4.2 per cent of GDP in 1999-2000.

4.29	In 2000-01, owing to the refocused attention on fiscal rectitude by both the Central and
State Governments the combined GFD, revenue deficit and primary deficit are placed lower at 8.6 per cent, 5.6 per cent and 2.9 per cent of GDP, respectively, as against 9.9 per cent, 6.7 per cent and 4.2 per cent in 1999-2000 (Table 4.3). The improvement in the deficit indicators is expected to be realised partly through larger revenue mobilisation proposed both in the budgets of the Centre and States and partly through the containment in the growth of expenditure. Revenue receipts are projected to grow by 10.3 per cent reflecting improvement in direct tax collections, while non-tax receipts are budgeted to decline by 12.8 per cent. The combined revenue and capital receipts are budgeted to grow at 6.6 per cent as compared with 19.3 per cent in 1999-2000, while the combined expenditure is budgeted to rise by 5.6 per cent in 2000-01 as against 20.4 per cent in the previous year (Appendix Table IV.6).

Table 4.3: Measures of Deficit of the Central and State Governments as proportion to GDP*

			(Per cent)
Year	Gross Fiscal Deficit	Revenue Deficit	Gross Primary Deficit
1	2	3	4
1990-91	10.0	4.5	5.3
1991-92	7.4	3.6	2.4
1992-93	7.4	3.4	2.3
1993-94	8.3	4.3	3.3
1994-95	7.1	3.7	1.9
1995-96	6.6	3.2	1.6
1996-97	6.4	3.6	1.3
1997-98	7.3	4.1	2.2
1998-99#	8.9	6.3	3.7
1990-99	7.7	4.1	2.7
(Average)
1999-2000 (RE) #	9.9	6.7	4.2
2000-01(BE) #$	8.6	5.6	2.9

RE Revised Estimates.

BE Budget Estimates.

*	The combined deficit indicators have been worked out after netting out the inter-Governmental transactions between the Centre and States. As such these figures will not be equal to the total deficits as worked out separately for the Centre and for the States. Details of the adjustments in respect of each deficit indicator are given in the note below.
#	Data in respect of State Governments are provisional and relate to the budgets of 24 States including the National Capital Territory of Delhi.
$	Worked out on the basis of the implicit nominal GDP underlying the Budget Estimates of Central Government GFD/GDP ratio of 5.1 per cent of 2000-2001.

Notes:	1.	Combined GFD is the GFD of the Central Government plus GFD of the State Governments minus net lending from the Central Government to State Governments.
	2.	Revenue deficit is the difference between revenue receipts and revenue expenditures of the Central and State Governments adjusted for inter-Governmental transactions in the revenue account.
	3.	Gross primary deficit is defined as combined GFD minus combined interest payments.

4.30	Expenditure allocation across various sectors shows that growth in non-developmental
expenditure has outstripped that of developmental expenditure (Chart IV.7). While the combined developmental expenditure is budgeted to increase by 2.3 per cent in 2000-01, the non-developmental expenditure including others shows an increase of 12.1 per cent. The share of developmental expenditure in total expenditure of the Government sector has been showing a decline since the beginning of the 1990s; it fell from 60.3 per cent in 1990-91 to 50.8 per cent in 1999-2000. The budget estimates for 2000-01 place the share of developmental expenditure still lower at 49.1 per cent. Expenditure on social sectors is budgeted to decline by 1.0 per cent in 2000-01 in contrast to a rise of 22.3 per cent in the previous year. Consequently, the social sector expenditure as a proportion of GDP would decline to 7.1 per cent in 2000-01 from 8.0 per cent in 1999-2000 and the average of 7.2 per cent during 1991-99.



4.31	With the growing size of the combined fiscal deficit, the Government sector's draft of
resources from domestic saving has increased significantly in recent years. The share of market borrowings in total resources for financing fiscal deficits of Centre and States rose to 44.2 per cent in 1999-2000 from 19.7 per cent in 1990-91 while the shares of other liabilities and external borrowings have seen a commensurate decline (Chart IV.8). The overall debt servicing burden of the Government sector has increased to 5.7 per cent of GDP in 1999-2000 from 4.7 per cent in 1990-91. For the current fiscal 2000-01, according to the Reserve Bank records, net market borrowings of the Central and State Governments are placed at Rs.87,383 crore as compared with Rs.85,482 crore in 1999-2000.



Market Borrowings

Central Government

4.32	The net market borrowings of the Central Government at Rs.73,077 crore during 1999-
2000 exceeded the budgeted target by 27 per cent. At this level, the gross market borrowing, as per Reserve Bank records, amounted to Rs.99,630 crore as against Rs.93,953 crore during 1998-99. Of the total gross borrowings, mobilisation through dated securities amounted to Rs. 86,630 crore, while short-term borrowings (364-day Treasury Bills) amounted to Rs.13,000 crore (Appendix Table IV.9). During 1999-2000, the Reserve Bank's initial support to the Central Government borrowing programme by way of private placement/devolvement of dated securities and devolvement of 364-day Treasury Bills amounted to Rs.29,267 crore (29.4 per cent of the primary issues) as against Rs.39,777 crore (42.3 per cent) during 1998-99. The initial subscription from the Reserve Bank, however, was relatively low during 1999-2000 due to the strong increase in the demand for Government securities by banks, financial institutions and mutual funds. The subsequent absorption of securities by the Reserve Bank could be offloaded through open market operations to the tune of Rs.30,861 crore. This was made possible due to easy liquidity conditions and positive market sentiment.

4.33	The debt management operations were successful in stabilising the interest rates and in
influencing the maturity pattern of the debt issues towards medium to long duration. The borrowing cost of the Central Government was stabilised at a relatively low level as reflected in the weighted average interest rate of the dated securities at 11.77 per cent in 1999-2000 as against 11.86 per cent in 1998-99 (Table 4.4). The yield on 10-year and 20-year bonds declined whereas at the short-end of the market, interest rates had hardened for most part of the year.

4.34	The Union Budget for 2000-01 has placed the net market borrowing of the Central
Government at Rs.76,383 crore, higher than the amount raised, as per RBI records, at Rs.73,077 crore in 1999-2000. Together with the maturing dated securities and repayment of 364-day Treasury Bills, the gross market borrowing requirement of the Central Government will rise to Rs.1,17,704 crore from Rs.99,630 crore in 1999-2000. During 2000-01 (up to August 10, 2000), gross market borrowings amounted to Rs.63,183 crore as against Rs.56,130 crore in 1999-2000.

Table 4.4: Weighted Average Coupon Rates/Cut-off Yields on Central and State Government Dated Securities

				(Per cent per annum)
Year	Central Government Securities		State Government Securities
	Range	Weighted Average	Range	Weighted Average
1	2	3	4	5
1993-94	12.00-13.40	12.63	13.50	13.50
1994-95	11.00-12.71	11.91	12.50	12.50
1995-96	13.25-14.00	13.75	14.00	14.00
1996-97	13.40-13.85	13.69	13.75-13.85	13.83
1997-98	10.85-13.05	12.01	12.30-13.05	12.82
1998-99	11.10-12.60	11.86	12.15-12.50	12.35
1999-2000	10.72-12.45	11.77	11.00-12.25	11.89

Source: Reserve Bank of India records.

State Governments

4.35	During 1999-2000, the net market borrowings of the State Governments were placed at
Rs.12,405 crore as against Rs.10,700 crore in 1998-99. Together with repayments, the gross borrowings amounted to Rs.13,706 crore in 1999-2000 as against Rs.12,114 crore in 1998-99. The State Governments mobilised a gross amount of Rs.13,706 crore through pre-announced issues (Rs.12,906 crore) and auctions (Rs.800 crore). In tandem with the falling coupon rates on medium-term loans of the Central Government, the coupon rate on State Government loans of 10 year maturity also witnessed a steady decline from 12.50 per cent in February 1999 to 12.25 per cent in April 1999 and further to 11.00 per cent by March 2000. Auction-based borrowings were undertaken by a few States (Andhra Pradesh, Tamil Nadu and Karnataka) to raise a part of their market borrowings. These States gained by way of lower cut-off yield (11.08-11.77 per cent) than the pre-announced coupon rate (12.25 per cent in April, 1999) on securities of the same maturity. According to the Reserve Bank records, the net allocation of market borrowings to States during 2000-01 is provisionally placed at Rs.11,000 crore (gross Rs.11,420 crore). During fiscal 2000-01, in the first tranche on April 25, 2000, States mobilised Rs.5,838 crore (notified amount Rs.4,369 crore) through the issue of 10-year State Development Loans at a pre-announced coupon of 10.52 per cent, which is 48 basis points lower than the coupon offered on the loan issued in March 2000. Furthermore, as a part of their market borrowing programmes, four States viz. Andhra Pradesh, Maharashtra, Tamil Nadu and West Bengal raised Rs.1,220 crore with issuance of 10 year State Development Loan through auction. The cut off yield ranged between 11.70 per cent (Maharashtra and Tamil Nadu) and 11.80 per cent (Andhra Pradesh and West Bengal). The amount devolved on the primary dealers against their underwriting commitments aggregated to Rs.264.63 crore. During the current fiscal so far, i.e., up to August 12, 2000 the State Governments had mobilised Rs.7,058 crore under their gross market borrowings.

DOMESTIC PUBLIC DEBT

Debt Position of Central Government

4.36	The high level of fiscal deficit of the Central Government has led to steady accumulation
of debt, as reflected in the rise in the debt-GDP ratio from 50.6 per cent as at end-March 1999 to 52.9 per cent as at end-March 2000. The debt-GDP ratio of the Central Government is estimated to rise further to 54.1 per cent as at end-March 2001. At this level, the stock of domestic debt is expected to grow at a rate of 15.4 per cent in 2000-01 as against 16.6 per cent in 1999-2000. A high overhang of domestic debt poses significant challenges for debt management from two major considerations. First, it leaves little flexibility for the debt management authority to minimise the borrowing cost in the face of continuous increases in bond supply. This may lead to an increase in the interest rate premium on fresh borrowings and therefore, hardening of yields. Secondly, a high stock of domestic marketable debt can raise future interest rate uncertainty and shift the market preference for short-term paper. As a result, there could emerge a problem of concentration of debt towards the shorter end, leading to bunching of redemptions and roll-over problems. The maturity profile of Central Government loans as on March 31, 2000 indicates large repayment liabilities, ranging between Rs.27,000 crore to Rs.31,000 crore, falling due during the next five years (2001-2002 to 2005-2006) (Table 4.5). To obviate the difficulties arising from bunching of repayments at the short end, a large part of the Central Government borrowings was placed at the longer end of maturity during 1999-2000. In fact, all borrowings in 1999-2000 were above 5-year maturity, ranging between 5 to 20 years and about 65.0 per cent of the borrowing was through issuance of bonds above 10-year maturity. The weighted average maturity of market loans during 1999-2000 increased to 12.6 years from 7.7 years in 1998-99. Nevertheless, the overall maturity profile of the marketable debt remained skewed towards the shorter and medium end of the market (Chart IV.9).

Table 4.5: Repayment Schedule for Market Loans of the Central and State Governments issued up to end-March 2000P

		(Rupees crore)
Year	Central Government	State Governments
1	2	3
2000-2001	28,321	420
2001-2002	28,260	1,446
2002-2003	28,263	1,789
2003-2004	31,252	4,145
2004-2005	31,159	5,123
2005-2006	27,473	6,274
2006-2007	29,394	10,308
2007-2008	30,151	7,797
2008-2009	30,223	14,396
2009-2010	26,195	16,265
2010-2011	21,109	2,569
2011-2012	8,610	3,349
2012-2013	1,755	-
2013-2014	15,691	-
2014-2015	15,588	-
2015-2016	4,173	-
2016-2017	11,630	-
2017-2018	-	-
2018-2019	12,632	-

P Provisional.

- Nil

4.37	In the Indian context, the debt-dynamics turned more adverse in the 1980s as the debt-
GDP ratio witnessed rapid growth from 43.9 per cent in 1981 to 58.7 per cent in 1991, stemming from a sharp rise in primary deficit. The fiscal adjustment measures initiated in 1991 contained the growth in primary deficits and hence accumulation of debt especially during the initial years of reforms. The resurgence of primary deficits since 1997-98 has, however, led to a reversal of the declining trend in the debt-GDP ratio, raising concerns about the sustainability of public debt in near future (Table 4.6).

Table 4.6: Alternative Indicators of Fiscal Sustainability of Central Government

						(Per cent)
Year	PD/GDP	Domestic	IP/RR	R(Debt)	R(ML)	R(GDP)
		Debt/GDP
1	2	3	4	5	6	7
1990-91	4.3	52.9	39.1	8.65	11.41	17.23
1991-92	1.6	51.5	40.3	9.09	11.78	15.17
1992-93	1.3	50.9	41.9	9.38	12.46	14.45
1993-94	2.7	50.1	48.7	9.72	12.63	21.72
1994-95	1.4	48.3	48.4	9.72	11.91	17.54
1995-96	0.9	47.0	45.4	9.82	13.75	17.04
1996-97	0.5	45.6	47.1	10.39	13.69	15.23
1997-98	1.5	47.7	49.0	10.22	12.01	11.28
1998-99	2.0	47.3	52.1	10.45	11.86	16.29
1999-2000	0.9	49.9	50.9	10.69	11.77	10.62

PD	=	Primary Deficit,
R(Debt)	=	Implicit nominal interest rate on total debt,
IP/RR	=	Interest payments as ratio to revenue receipts,
R(ML)	=	Weighted average nominal interest rate on market loans based on primary market,
R(GDP)	=	Nominal GDP growth rate.

Debt Position of State Governments

4.38	The combined outstanding debt of State Governments as a percentage to GDP rose to 21.4
per cent as at end-March 2000 from 19.4 per cent as at end-March 1999. The debt-GDP ratio of State Governments is projected to increase further to 22.7 per cent by end-March 2001. The consolidated outstanding debt of States remained at an average of 19.3 per cent of GDP during the 1990s. As the nominal stock of debt has recorded a high rate of growth of 16.0 per cent on an average during the 1990s, there are serious concerns about the long-term sustainability of State finances. Given the fact that the States face a hard borrowing constraint, any significant rise in the public debt burden may have adverse implications for resource allocation to some of the critical social sectors. The ratio of States' marketable debt to GDP increased from 2.4 per cent in the 1980s to 3.2 per cent in the 1990s. The interest rate on market borrowing of State Governments increased from 11.50 per cent in 1990-91 to 12.35 per cent in 1998-99, but declined to 11.89 per cent in 1999-2000.

4.39	The share of debts owed to the Centre in the States' total outstanding debt amounted to
58.3 per cent in 1999-2000 as against the average of 63.3 per cent in 1990-99. With accumulation of huge repayment commitments and interest charges on such loans, the net transfer of resources from the Centre to States has been shrinking. This is reflected in the fact that net transfer of resources from the Centre to States as ratio to gross transfer has declined from 78 per cent in 1990-91 to 73 per cent in 1999-2000.

4.40	Despite the implicit limits on the debt raised through market loans and loans from the
Centre, the States' debt in recent years has been growing at a rapid pace on account of higher borrowings from other sources, e.g., loans from banks and other financial institutions and drawals from public accounts, especially the State provident funds. During 1999-2000, the outstanding loans from banks and other institutions grew at the rate of 63 per cent and public account liabilities by 28 per cent, together accounting for 25 per cent of the States' total outstanding debt as at end-March 2000 as against 22 per cent as at end-March 1999. Management of these liabilities, apart from marketable debt, assumes crucial importance in ensuring sustainability of States' debt position.

Combined Debt

4.41	The nominal stock of domestic debt of the combined Government sector has been growing
at a rate of about 16 per cent during the later part of the 1990s. The higher growth in domestic debt than that in nominal GDP growth has led to steady debt accumulation to 60.7 per cent of GDP by end-March 2000. The debt growth remained below the nominal GDP growth during the first half of the 1990s and the debt growth has generally exceeded the nominal GDP growth since 1997-98 with an exception to 1998-99 (Chart IV.10). As high levels of public debt have deleterious effects on macro-economic stability, the need for reducing the fiscal deficit and debt to sustainable levels through, institution of policy oriented fiscal rules is widely felt. There are some well recognised fiscal policy rules and legislations incorporating specific targets or ceilings or conditionalities. Such legislation, apart from achieving fiscal sustainability, brings about greater fiscal transparency and accountability, provides enhanced flexibility in the conduct of monetary policy and promotes prudent fiscal behaviour. This would be best facilitated if the debt stability condition, which suggests that the output growth rate should exceed the interest rate, is met.

Box IV.1

Pension Funds

The primary objective of pensions is to assure the employees about receipt of a certain income during their old age. In the developed countries, the pension amount is worked out on the basis of pay-as-you-go principle in which the benefits are defined and the current worker pays for the current retired and retirees. The intergenerational transfers have been justified, inter alia, on equity consideration. The World Bank has recommended a three-pillar approach to pensions. The first pillar is a mandatory, publicly managed system which would be financed through taxes and would ensure a means-tested minimum guaranteed pension. The second pillar is also a mandatory system but managed privately. It would be fully funded through personal savings whose investments are regulated. The third pillar is a voluntary and fully funded system and investments are not regulated. The second and third pillars are based on a defined contribution principle having tighter link between the contributions and benefits which requires the maintenance of individual accounts.

Of late, pension funds are receiving focused, worldwide attention and several reform measures are being suggested. The current interest in pension funds is due mainly to three reasons. First, the public pension system in its present form is unsustainable because of the deteriorating dependency ratio (on account of elongated life span, especially after superannuation), the increasingly generous benefits for past and current retirees, and the slow down in real wages growth (which has increased the ratio of average retirement benefit to average wage). Secondly, the real return on the contribution made by the participants to the scheme is lower than that available from other forms of investment. In this context, reforms of pension schemes in Latin American countries, especially Chile, have shown that, when invested in capital market, the returns were higher. Besides, over the generations, the pensions in real terms to the retirees have been declining. In the USA, the first generation retirees had earned an average inflation adjusted annual returns of about 35 per cent, while the subsequent generations had earned returns of 4 to 11 per cent. Thirdly, some economists have found that the schemes tend to reduce the savings of the individuals and that the Governments tend to spend more thereby reducing its saving. On this reasoning, it is argued that the emphasis of the reform measures should be on closer linkages between contributions and benefits (defined contribution principle), funding of the schemes, individual accounting, and liberal pattern of investment with stress on capital market instruments. As for pension funds in developing countries, it is usually suggested that they should be permitted to invest abroad because of the benefit of global portfolio diversification (this would compensate possible adverse effects of high volatility in the domestic capital market in the face of low risk tolerance of pensioners) and the doubtful beneficial externalities for financial development domestically. However, there could be regulation on external exposure at the initial stages due to the high fiscal costs of moving from unfunded to fully funded schemes.

While there is a general consensus on the unsustainability of the public pension schemes in the present form, and on the acute transitional difficulties in moving from a programme based on pay-as-you-go principle to funded principle, there is dissent in respect of other aspects. The contention that diversified investment (in capital market instruments) of pension funds would yield higher return is based mainly on the past experience of equity premium which could be misleading for two reasons. First, even if it is materialised, it would be a compensation for the risk and hence risk-adjusted premium is unlikely to be different. Secondly, the infusion of pension funds, which would be substantial in any country would by itself reduce the equity premiums. Besides, the fundamental forces underlying equity premium are complex and may materially deviate in future from the past pattern. As for the impact on aggregate saving, it is impossible to predict with certainty any direction because individuals and Governments may react to reform in a range of potentially off-setting manner. For instance, funded pension schemes could promote aggregate savings only when (a) the schemes are mandatory, (b) tax exemption on pension returns are limited to low savers, and (c) borrowals against the accumulated mandatory pension assets are discouraged.

In India, the Union Ministry of Social Justice and Empowerment had commissioned in 1998 a study to suggest concrete measures which the Government could consider the implementation of old age pension schemes for currently young workers. The report of the project, called Old-Age Survivor and Income Security, has suggested a defined contribution scheme, based on Individual Retirement Account. Analogous to the suggestion elsewhere, it has recommended investment, in varying degrees, in the capital market.

References

1.	Atkinson, A., (1987), Income Maintenance and Social Insurance in Handbook of Public Economics, Vol.2, Ed. By M. Feldstein, and Auerbach, A., Elsevier Science Publishers, Amsterdam.

2.	Government of India, (2000), Ministry of Social Justice and Empowerment, Project OASIS Report, New Delhi, January.

3.	Holzmann, R., (1997), Fiscal Alternatives of Moving from Unfunded to Funded Pension, Technical Papers, No.126, OECD Development Centre, August.

4.	Miller, S., (1997), The Market to the Rescue? The Promise - and the Price - of the New Social Security Investment Proposals, Current Issues in Economics and Finance, Federal Reserve Bank of New York, Vol.3, No.10, August.

5.	Queisser, M., (1999), Pension Reform: Lessons from Latin America, Policy Brief No.15, OECD Development Centre.

6.	Reisen, H. and J. Willamson, (1994), Pension Funds, Capital Controls and Macroeconomic Stability, Technical Paper No.98, OECD Development Centre, August.

7.	The World Bank, (1994), Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth, Oxford University Press, New York.

4.42	The public debt of the Government may be viewed from the perspective of the
developments in Governments' quasi-fiscal activities, unfunded liabilities (viz., liabilities arising from unfunded public pension or insurance schemes) and contingent liabilities (viz., loan guarantees, exchange rate guarantees, deposit insurance etc.). From the viewpoint of prudent long-term fiscal management, the pension and provident funds need to be fully funded and managed on the principles of well established market practices (Box IV.1). Since the estimates on the hidden subsidies/quasi-fiscal activities are not readily available, it is difficult to measure their definite impact on fiscal policy. Secondly, the impact of unfunded liabilities arising from pension obligations to employees in the public sector has been significant. The outstanding liabilities of the Central and State Governments against the State and public provident funds, insurance and pension funds and special deposits of non-Government provident funds amounted to Rs.1,68,617 crore in 1997-98 as against Rs.60,753 crore in 1990-91. Thirdly, Central and State Governments are providing guarantees for promoting economic activities, which are presently estimated at around 9 per cent of GDP (Table 4.7). Although from the accounting viewpoint, guarantees do not form part of the public debt, such contingent liabilities could pose constraints on Governments in working out future fiscal strategies in the event of default. The Governments have recognised the concerns arising from these developments. For the medium-term management of fiscal deficit, the Union budget for 2000-01 proposed to bring about an institutional mechanism embodied in a Fiscal Responsibility Act (Box IV.2). Similarly, recognising the need to contain growth in guarantees to prudent levels, some State Governments have already placed a limit/ceiling on guarantees.

Box IV.2

Fiscal Responsibility Legislation

Fiscal policy rules tend to be heterogeneous and complex and vary across countries in terms of target variable, institutional coverage, method of implementation, trigger mechanisms and penalty clauses. Like any other rule-based policy, fiscal policy rules can also be outlined in terms of stringency, precision and enforcement of the statutory instrument. Compliance can be deemed at both ex ante (budget approval) and ex post (budget execution) levels, subject to well defined penalties.

There are universally recognised fiscal policy rules, broadly conforming to three types - balanced-budget or deficit rules, borrowing rules and debt or reserve rules. The deficit rules focus upon the balance between revenues and expenditures, while the borrowing rules place a restriction on the borrowing of government from the Central Bank. The debt rules place a limit on the stock of gross (or net) Government liabilities as a proportion of GDP, and the reserve rules target the stock of reserves of extra budgetary contingency funds. A country may follow all or some of these rules.

Rules are country-specific. Most have judicial sanctions for non-compliance as a penalty (financial, judicial or reputational). The countries which have imposed a budget rule are Argentina, Brazil, Canada, the European Union, Germany, New Zealand, Switzerland and the United States. The EU and New Zealand follow a debt ceiling rule. The EU and New Zealand, thus, have both budget and debt rules.

In India, while there is a long history of established accounting practices, auditing system and public scrutiny of Government revenue and expenditure programmes, the enforcement mechanism for ensuring fiscal discipline is generally weak. Although the fiscal policy is committed towards reducing the fiscal deficit and debt to a sustainable level such a commitment is not backed by specific legislative provisions that would ensure compliance and enforcement by the Government. Some of the recent fiscal innovations, have, nevertheless, gone to minimise the adverse consequences of monetisation of the fiscal deficit and promote better co-ordination of fiscal and monetary policies. For example, the formal agreement between the Government of India and Reserve Bank of India in 1997 to abolish the system of automatic monetisation of fiscal deficit through issue of ad hoc Treasury bills and to replace it with the limited facility of ways and means advances from the Reserve Bank falls in this category. The other recent fiscal policy initiatives towards promoting transparency and accountability relate to greater degree of disclosure and dissemination of information on fiscal health, and subjecting fiscal policy to a higher degree of market discipline and developing informal mechanisms, such as the recently established expenditure commission, to ensure higher order of fiscal discipline. It is in this context that the Budget for 2000-01 aiming towards the medium-term management of the fiscal deficit has stressed that fiscal policy would be strengthened through the 'support of a strong institutional mechanism embodied in a Fiscal Responsibility Act' (Union Budget, 2000-01).

References

1.	Bayoumi, Tamim and Barry Eichengreen, (1995), 'Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilisation' IMF Staff Papers.

2.	Government of India, (2000), Budget Speech, Union Budget -2000-01.

3.	Kopits, George and Steven Symansky, (1998), Fiscal Policy Rules, Occasional Paper 162, International Monetary Fund, Washington.

4.	Y.V.Reddy, (2000), 'Legislation on Fiscal Responsibility and Reserve Bank's Role: Some Issues', RBI Bulletin, March.

Guarantees/Contingent Liabilities of Governments

4.43	The guarantees given by the Central Government in nominal terms rose from Rs. 50,575
crore to Rs. 74,606 crore between end-March 1992 and end-March 1999 (Table 4.7). However, in relation to GDP, the outstanding guarantees declined from 8.2 per cent of GDP to 4.2 per cent during the same period. Recognising the importance of funding guarantees, the Union Budget for 1999-2000 has proposed a Guarantee Redemption Fund aimed at promoting transparency and curbing the growth of contingent liabilities. The outstanding State Government guarantees (17 major States) as ratio to GDP stood at 4.7 per cent, at end-March 1999, lower than the level of 6.5 per cent as at end-March 1992. However, the nominal stock of guarantees has witnessed an annual average growth of 11.1 per cent between end-March 1992 and end-March 1999. The latest provisional data available on guarantees show that outstanding stock of guarantees for 17 major States amounted to Rs.90,391 crore as at end-September 1999.

Table 4.7 : Outstanding Government Guarantees

			(Rupees crore)
Year	Centre	States*	Total
(End-March)
1	2	3	4
1992	50,575	40,159	90,734
	(8.2)	(6.5)	(14.7)
1993	58,088	42,515	1,00,603
	(8.2)	(6.0)	(14.3)
1994	62,834	48,866	1,11,700
	(7.2)	(5.6)	(12.7)
1995	62,468	48,479	1,10,947
	(6.0)	(4.7)	(10.7)
1996	65,573	52,631	1,18,204
	(5.4)	(4.3)	(9.7)
1997	69,748	63,409	1,33,157
	(4.9)	(4.5)	(9.4)
1998	73,877	73,751	1,47,628
	(4.7)	(4.7)	(9.4)
1999	74,606	83,075	1,57,681
	(4.2)	(4.7)	(8.9)

* Pertains to 17 major States.

Note: Figure in brackets are percentages to GDP.

4.44	Apart from the explicit contingent liabilities, State Governments have been issuing letters
of comfort to banks/financial institutions, which are in the nature of implicit guarantees and are not included in the present estimates of guarantees. The letters of comfort are, however, internationally treated as guarantees since these are equivalent to implicit liabilities. Recognising the need to contain guarantees devolving upon State governments, the Technical Committee on State Guarantees (1999) recommended that the Government may eschew the practice of providing letters of comfort and where comfort from a State Government is required, credit enhancement may be provided only through guarantees within the overall limit fixed for the purpose. Since the guarantees provided through this route have important implications from the viewpoint of transparency in the budgetary practices and integrity of the fiscal account, the implicit guarantees provided by the State Governments need to be disclosed in the budget and included in the stock of contingent liabilities.

4.45	Another dimension of State guarantees is the quality of guaranteed loans and the element
of risk associated with such guarantees. In order to ensure that the difference in the risk between investment in State Government securities and that in State Government guaranteed bonds outside the market borrowing programme is properly reflected, the Reserve Bank in October 1998 advised the banks that with effect from 2000-01, investments in State Government guaranteed securities outside the market borrowing programme would attract a risk weight of 20 per cent. Furthermore, in case of default in payment of interest/principal of such bonds, banks should assign 100 per cent risk weight for investments in such securities. However, since April 2000, norms have been amended so that risk-weightage would apply only to guaranteed bonds of defaulting entities and not on all the securities guaranteed by that State Government in place of the earlier prescription of assignment of 100 per cent risk weightage on investments in all securities guaranteed by the State Governments. Some State Governments have initiated necessary legislation towards placing a statutory limit on guarantees. Gujarat was the first State to announce such a ceiling on the level of guarantees. Karnataka and Rajasthan have also prescribed a cap on total outstanding Government guarantees while States like Tamil Nadu, Bihar and Nagaland are considering the issue of a ceiling on guarantees. Moreover, since States are encouraged to borrow through auctions from the market, as against the fixed coupon loan system, accumulation of explicit and implicit guarantees could have adverse implications for the interest rate at which they can raise resources from the market.


1.	Exclusive of States' and UT's share of small savings.
2.	Excludes data for the Governments of Tripura and Arunachal Pradesh, but includes States that have presented Vote-on-Account budgets, viz., Andhra Pradesh, Orissa, Bihar and Manipur.
3.	The Eleventh Finance Commission, in its interim report has recommended the States' share of the net proceeds of divisible income tax to be 80 per cent and 52 per cent of basic excise duties, as against 77.5 and 47.5 per cent respectively, proposed by the Tenth Finance Commission. In the final report submitted on July 7, 2000, the Eleventh Finance Commission recommended that the share of States in the net proceeds of all Union taxes and duties would be 29.5 per cent.

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