Tuesday, 19 April 2011

State Finances: From Crisis to Comfort

At the end of the last century the state faced a “fiscal crisis of unprecedented proportions”. In 1998 total tax revenue collection (Own Taxes) was around Rs 7000 crore and the salary expenditure, for around Sixteen Lac employees, was Rs 11000 Crore. In other words state’s own revenues were not even enough for paying salaries to state employees. However the decade that followed saw a committed effort by the state and the results are there for every one to see. Today Uttar Pradesh paints an exceptional story of fiscal transformation. The performance is so exceptional that in recent years UP emerges as one of the front runners on a number of indicators. This naturally calls for an objective assessment of UP’s Budgetary scenario.
It will be most appropriate to analyze state’s budgetary performance in the backdrop of Twelfth Finance Commission targets on six indicators, which all states are required to achieve. These indicators include Fiscal Deficit to be brought down to 3% of GSDP; Revenue deficit to be eliminated; Own tax revenues higher than 6% of GSDP; Non tax Revenues higher than 1.4% of GSDP; and Debt burden lower than 30% of GSDP. Interestingly on five of the six indicators, in 2008-09 i.e. much before the targeted timeframe, UP outperformed the targets laid down by the Twelfth Finance Commission (TFC). Debt was the only indicator where UP lagged behind the targets.

Figures ‘A1’ & ‘A2’ present a revealing interstate comparison on Revenue Deficit performance across seventeen major states. During 2004-07 (average) UP had a revenue deficit of 0.6% against the TFC target of 0%. During 2007-08, however, UP records a Revenue Deficit of (-) 2.6% (or Revenue Surplus of 2.6%). Interestingly UP ranked tenth during 2004-07, however by 2007-08 UP bettered seven major states and emerged as the third best performer in the country.

Fig ‘A1’ Revenue Deficit/ Surplus in 17 Major States in 2004-07 & 2007-08

Fig ‘A2’ Revenue Deficit/ Surplus in 17 Major States in 2008-09

On the Fiscal Deficit front too UP records a deficit of 4% during 2004-07 (average). This was 1% short of TFC target. However, in 2007-08 UP recorded Fiscal Deficit of 3% which was in conformity with the TFC targets. Figure ‘B’ presents a comparative picture of 17 Major States in the country. It is obvious that during 2004-07 UP ranked 12th and moved to 8th rank in 2008-09.

Fig ‘B’ Fiscal Deficit of 17 Major States

The impact of the implementation of Sixth Pay Commission recommendations along with the global meltdown compromised UP’s Fiscal Deficit which slipped to over 6% of GSDP, revenue surplus also came down significantly. However, in 2010-11 Fiscal deficit has been brought down to 3.9% and was expected to go down to around 2.9% in 2011-12. Revenue surplus was never allowed to get converted into revenue deficit irrespective of the pressures involved. And in 2011-12 it rises to over 5000 crore. This certainly is an indicator of increased fiscal consolidation and an expression of fiscal responsibility.

Equally significant is the rise in capital expenditure. In 1998, the year of fiscal crisis in UP, Capital expenditure shrank to around 8%. In other words state was left with no capacity to initiate development. By 2009-10 it rose to 18% and now in 2011-12 budget it rises to 25.7% of the total expenditure. This is a critical indicator of state’s capacity to initiate development, and suggests towards the potential of the state to move into fast growth path. The rise in social expenditure is equally significant. Education alone records a rise of 19.6% in the current budget. This ‘development space’ is substantially the outcome of responsible fiscal management. Revenue buoyancy in state taxes has been a major contributor to this fiscal performance. It need be highlighted that in 2009 revenues of government of India fell by around Rs 60000 crore but UP’s revenues rose by 17% in the same year. The story seems to continue in this budget too. State’s own revenue rises to around Rs 50000 crore which is higher than the projections made in 2008-09 by some of the international agencies.
It may be noted that after introduction of VAT tax, collections have declined in the first year after such introduction. However, in UP taxes seem to show significant buoyancy in 2008/09 and thereafter. Interestingly, Uttar Pradesh has become the first state in the country to register growth in tax collection in the first year after introduction of VAT. These are encouraging signs and augur well for the possibility of further fiscal consolidation, at least in the medium term.

Fiscal space is the pedestal on which the state weaves its effort towards development and social change. It need be noted that during the 1990s UP’s rate of growth was only 4%. In last three years the state has grown at over 7%. Rising fiscal space and increased capital expenditure have hugely contributed to this changing story. The budget indicates towards stabilising state finances, rising capital expenditures and falling deficits. This year is also significant because Government of India’s revenues, which have taken a beating, have begun to rise implying that state’s share in central taxes will also rise; The arrears burden of the sixth pay commission has also been taken care of and will not burden future state budgets. This will only improve the fiscal space further. In other words the state is development ready, and an appropriate marshalling of resources can take the state into the higher trajectory of development and social change.

 Dr Arvind Mohan

· Arvind Mohan is an eminent economist, he teaches at Lucknow University and is Associated with a number of National and International Organizations.

No comments:

Post a Comment