“State Finances: A Study of Budgets of 2015-16” by RBI

State Finances: A Study of Budgets of 2015-16 report by RBI adopts quality of expenditure as its theme. The report has highlighted that the states budgeted for a turnaround in fiscal performance during 2015-16 from the deterioration that set in during the earlier two years.

The report is an assessment of the finances of state governments and provides an analysis on the fiscal position of the state governments. The theme of this year’s report is ‘Quality of Expenditure’. The report has highlighted that the projected improvement in key fiscal indicators was premised on cutbacks in revenue expenditure with a marginal decline in capital outlay. The reports confirms that the composition of government expenditure can have perceptible growth implication.

The report observes that expenditure quality at the sub-national level has improved under the impetus provided by implementation of fiscal responsibility and budget management (FRBM) rules. Also the states have been cautioned against the adverse implications that the power sector reform scheme UDAY could have for state finances due to growing liabilities on them to take over 75% of the existing debt of power distribution companies. This would also hurt growth by impacting developmental expenditure.

Major Deficit indicators of State Governments                                   (Amount in Rs. billion)                                                                       

 

Note: 1. Negative (-) sign indicates surplus.

 2. Figures in parentheses are percentages to GDP.

 3. The ratios to GDP at current market prices are based on new GDP series (Base:2011-12) released by CSO in early 2015.

Source: PHD Research Bureau compiled from Budget documents of State Governments, RBI.

Snapshot of major findings of the study:

·         The empirical analysis indicates that expenditure on social and physical infrastructure could have growth augmenting effects.

·         The quality of expenditure could be improved through prioritization and rationalization that would generate fiscal space for raising the share of capital expenditure, which is conducive for growth.

·         Reforming state level public enterprises and the proposed implementation of the consumption-based destination-centric goods and services tax (GST) could strengthen state finances.

·         Around 30% of the operating 849 state-level public enterprises (SLPEs) in the country are estimated to be incurring losses

·         The report said apart from budgetary support to SLPEs, state governments need to invest in research and development for enhancing product quality while consumer preferences need to be gauged through market surveys.

·         The implementation of The Goods and Services Tax (GST) will make industry more competitive through dismantling of the complex indirect tax structure and boost the tax revenue of states and will pave the way for a common national market for goods and services.

·         While 20 states have budgeted for revenue surplus, 18 have budgeted for improvements in their revenue accounts in terms of GSDP.

·         The contribution of public account items like ‘deposits and advances’ and ‘suspense and miscellaneous’ in GFD financing has declined.

·         The consolidated revenue expenditure GDP ratio of state governments is budgeted to be smaller by 0.7 percentage points due to lower growth in its developmental component

·         Capital expenditure  is budgeted to decelerate in 2015-16. The major concern is not only the deceleration of developmental capital outlay on social and economic services, but an absolute decline in capital outlay on services

The report has analyzed the fiscal positions of the states. The report says that public finances of states deteriorated in 2013-14 and 2014-15 (RE). While revenue receipts slowed in 2013-14 as overall economic activity slowed, they were shored up in 2014-15 by grants in aid through enhanced transfers under ‘State Plan Schemes’. Despite higher devolution of taxes, central transfers-GDP ratio is budgeted to decline in 2015-16 due to discontinuation of many centrally sponsored schemes. Expenditure rationing measures have been budgeted to arrest the erosion in state finances in 2015-16 (BE), but adverse implications for the quality of consolidation raise concerns.

The quality of expenditure is of prime importance at sub national level fiscal consolidation in India . Empirical evaluation indicates that expenditure on public infrastructure, human capital, science and technology can be growth and welfare augmenting by improving capital and labour productivity. Further, the report says that the quality of expenditure of most Indian states has modestly improved following the enactment of FRBM. It is suggested that states need to prioritize expenditure on physical and social infrastructure and economize on non-essential heads.

From a medium term perspective, enduring improvements in the quality of states’ finances revolves around the revival of state level public enterprises (SLPEs) and improving the viability of Discoms, alongside the rationalization of centrally  sponsored schemes. Strengthening of state finance commissions would facilitate resource empowerment through greater devolution to local bodies. Further, issues with revenue implications for both the Centre and states have to be addressed for enabling a smooth roll-out of the goods and services tax (GST).

Going forward, the report highlighted an important fact that given the fiscal constraints and limited maneuverability of states in augmenting tax revenue, institutional reforms/restructuring will  play a pivotal role in fiscal consolidation over the medium-term by both enhancing non-tax revenue and pruning unproductive expenditure.

Warm regards,