The key deficit indicators of the consolidated state governments relative to GDP are budgeted to improve in
2013-14, with an increase in revenue surplus contributing to a reduction in the gross fiscal deficit (GFD).
Although the development expenditure-GDP ratio is budgeted to decline in 2013-14, it would still be higher
than the high growth phase (2004-08) as well as the immediate post-crisis period (2008-10). Notwithstanding
the sustainability in the overall debt position of the states, narrowing of the growth-interest rate differential
could exert pressure on the debt of certain states in the medium-term. Further, increase in contingent, off-budget
and unfunded liabilities of some states could pose risks to fiscal sustainability. An econometric exercise using
panel regression for the period 1980-81 to 2012-13 reveals that, at the state level, primary revenue expenditure
was acyclical and capital outlay, pro-cyclical. Going forward, central and state governments should work in the
spirit of co-operative federalism to remove all legislative hurdles in the introduction of the goods and services tax,
which has far reaching implications, both for tax revenues as well as growth. The non-development primary
expenditure-GDP ratio needs to be brought down. States which have built large revenue surpluses may utilise the
same to increase capital outlay, particularly for building infrastructure, provided they have adequate fiscal space.
1. Introduction
1.1 The fiscal position of state governments
indicates continuation of the process of
fiscal consolidation which was resumed in
2010-11, consequent to the amendments in
their FRBM Acts, in line with the targets set by
the Thirteenth Finance Commission (FC-XIII).
Fiscal consolidation gained further momentum in
2011-12, with an improvement in all the key deficit
indicators at the consolidated level. Revenue
surpluses were a result of the combined effect of
a reduction in revenue expenditure and increase
in own revenues relative to GDP as compared to
the post-crisis period (2008-10). However, revenue
surpluses declined somewhat in 2012-13(RE) and
the GFD-GDP ratio rose on account of increases in
capital outlay and development expenditure, even
as it remained within the FC-XIII’s target. All key
deficit indicators are budgeted to improve in 2013-
14. Macroeconomic conditions, policy initiatives of
the central and state governments and the states’ commitment to adhering to the path of fiscal
consolidation would shape the eventual fiscal
outcome in the medium term. This report on ‘State
Finances: A Study of Budgets of 2013-14’1 has
been prepared based on the data available in the
budget documents of 28 state governments and
two union territories with legislature (NCT Delhi
and Puducherry), supplemented by data from the
Reserve Bank, Government of India and Office of
the Comptroller and Auditor General of India.
2. Preview
1.2 The fiscal position of state governments for
2013-14, based on their budget estimates, shows
an increase in revenue surplus to 0.4 per cent of
GDP. This is driven entirely by a reduction of 0.2
percentage points in the revenue expenditure-
GDP ratio. A higher surplus in the revenue account
would help reduce the GFD-GDP ratio to 2.2 per
cent of GDP despite a marginal increase in the
capital outlay-GDP ratio in 2013-14 (BE).
1.3 At the disaggregated level, the key deficit
indicators are budgeted to improve in both nonspecial
category (NSC) and special category
(SC) states in 2013-14 (BE). While 22 states
have budgeted for revenue surpluses, 13 states
expect to improve their revenue accounts in terms
of GSDP. GFD and primary deficit (PD) as ratios
to GSDP are budgeted to decline in 16 and 15
states, respectively in 2013-14.
1.4 To increase states’ own tax revenue, many
states have raised taxes on tobacco and liquor
products, besides a few other products, and some
states have proposed measures for simplifying
tax procedures and for improving tax compliance.
Measures on the expenditure front include
increased outlays for the power sector to meet
commitments under the financial restructuring plan
for state power utilities, strengthening the public
distribution system (PDS) and creating adequate
storage facilities for implementation of the National
Food Security Act, besides continuing to accord
importance to education, health, agriculture and
infrastructure.
1.5 The debt-GDP ratio at the state level
declined in 2012-13 (RE), although the pace of
reduction slowed down considerably, reflecting
the impact of deceleration in nominal GDP growth
and the increase in the GFD-GDP ratio. Market
borrowings were the predominant component,
accounting for 40.2 per cent of the outstanding
liabilities of the states. While special securities
issued to NSSF accounted for 22.4 per cent of
the outstanding liabilities of the states, loans from
the centre accounted for only 6.9 per cent. The
declining trend in the consolidated debt-GDP ratio
is expected to continue in 2013-14, aided by the
budgeted decline in the GFD-GDP ratio. However,
the ongoing financial restructuring of the stateowned
power distribution companies (discoms)
would add to the debt and contingent liabilities of participating state governments in the coming
years.
1.6 Many state governments have accumulated
sizeable cash surpluses in recent years, reflecting
the fiscal consolidation process as well as their
precautionary motive of building a cushion for their
expenditures. Liquidity pressures during 2012-13
were, thus, confined to a few states; eight states
availed of normal ways and means advances
(WMA), of which six states were in overdraft. The
existing normal WMA limits of the states, that help
them meet any short-term funding gaps, have
been raised by 50 per cent in November 2013 by
the Reserve Bank.
1.7 Some of the recent policy initiatives of
the central government, like the restructuring
of centrally sponsored schemes and the
implementation of the National Food Security Act
2013 would entail additional responsibility at the
state level. Hence, the finances of the states are
not only being shaped by their own policies but
also by the policies of the central government.
Revenue raising prospects of state governments
in the medium-term would be influenced by the
introduction of the proposed goods and services
tax (GST). However, this is contingent on the
constitution amendment bill being passed and
subsequently ratified by at least 50 per cent of the
states. This would require resolving contentious
issues between the centre and the states through
mutual confidence building measures/steps.
1.8 On the debt front, although the overall debt
position of state governments is sustainable, a
slowdown in growth momentum could affect their
revenue raising capacity, with adverse implications
for incremental debt and debt servicing capacity
of some states. Moreover, withdrawal of interest
relief for those states which have not adhered
to their FRBM targets may increase their debt
service burden. Considering the potential risk to the fiscal and debt sustainability of the state
governments that may arise from contingent, offbudget
and unfunded liabilities, there is a need
for greater fiscal transparency in the disclosure
of such liabilities for proper assessment of their
financial health.
1.9 Unlike many federal economies where
sub-national revenues and expenditure move in
line with business cycles, fiscal expenditures of
Indian states exhibit different cyclical behaviour
across different components as revealed by a
panel data analysis covering non-special category
states during 1980-81 to 2012-13. While capital
outlay is found to be pro-cyclical, primary revenue
expenditure turns out to be acyclical as it does not
respond to growth cycles. This can be explained
by the fact that given the more stringent resource
constraints for state governments, the underlying
rigidities in adjusting primary revenue expenditures
result in the fiscal authorities cutting or expanding
capital expenditures in line with growth cycles.
1.10 The increase in development expenditure
in recent years is a welcome feature and should be
maintained. Going forward, the states may have to
focus on cutting down non-development primary
expenditure, particularly untargeted subsidies,
as the scope for further reduction in the IP-GDP
ratio through interest resets may be limited,
considering the continued shift towards market
borrowings. Further, states may explore ways to increase their non-tax revenue through increases
in user charges. Emphasis may also be placed on
improving the efficiency of resource use. States
which have built large revenue surpluses may
utilise these to increase capital outlay, particularly
for building infrastructure, provided they have
adequate fiscal space.
1.11 The chapter-wise scheme of the report
is as follows: While this chapter has provided an
overview of the report, major issues relating to the
finances of the states are highlighted in Chapter
II. Major policy initiatives undertaken by state
governments, the Government of India and the
Reserve Bank are presented in Chapter III. Chapter
IV provides an analysis of the fiscal position at the
consolidated level and the underlying state-wise
contributions. 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, ‘Cyclicality in the Fiscal Expenditures of
Major States in India’. The consolidated data on
various fiscal indicators of 28 state governments
are covered in Appendix Tables 1-13, while statewise
data are provided in Statements 1-34. 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).
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