State budgets rarely get national attention. The small size could be a reason. The country's fiscal health tends to be assessed through the Centre's budgetary trends. This narrow view ignores many important factors.
Though the budget of each State may be relatively small, the overall revenue and expenditure of States are significant. The Economic Survey presented with the latest Union budget underlines the macroeconomic impact of the Consolidated General Government account, that is, total expenditure and revenue of Centre and States with supporting data for Budget Estimate 2009-10 .
The revenue and fiscal deficits show an increase in the combined State and Central government projection, 5.2 per cent and 9.7 per cent, respectively, of GDP as against 4.6 per cent and 6.5 per cent in the Centre's budget.
The efficiency in utilising the large sums — Rs.87,343 crore in budget estimate 2010-11 — transferred by the Centre to States as grants and loans for implementing various Plan schemes is also a factor in the macroeconomic impact. In addition, there is a direct transfer of funds from the Centre to States and district level autonomous bodies and implementing agencies. Another interconnection is the non-Plan assistance of Rs.45,135 crore.
Besides, States have been granted debt waiver of Rs.22,039 crore and interest relief of Rs.18,688 crore from 2005 to 2009.
Any serious erosion in fiscal stability of the Centre or States due to all these above factors will affect macroeconomic development.
It is, therefore, necessary to examine the fiscal health of States also instead of focusing only on Central finances.
Fixing debt ceiling
The Constitution of India does not provide for any ceiling on government debt. It left the same to Parliament to fix a suitable limit. No such law has been passed so far. Parliament enacted the Fiscal Responsibility and Budget Management Act, 2003, fixing a time-bound plan for controlling the budgetary deficits. Deficits, that is, spending beyond receipts, result in borrowing to finance the same. Any ceiling on these will be a ceiling on government debt. States (except West Bengal and Sikkim) have followed the State fiscal responsibility laws with a time schedule for controlling their budgetary deficits.
Fiscal issues
The record in implementing the fiscal law has revealed some worrying trends. Any fiscal consolidation achieved is more due to revenue buoyancy and recourse to off budget items to show less expenditure in government budgets. Even so, the targets have been breached due reportedly to fiscal stimulus and the like. The Thirteenth Finance Commission has rolled over the targets to eliminate the revenue deficit and to bring down the fiscal deficit to 3 per cent by 2014-15. There seems to be no realisation that conformity with the quantitative targets set by fiscal law will lead to fiscal consolidation and debt sustainability only if it is based on basic reforms in revenue and expenditure policy and management. There are many serious fiscal issues that are yet to be addressed.
One major issue is the substantial proportion of non-Plan expenditure on pay and allowances and pension, thanks to successive pay commissions, subsidies and non-developmental expenditure. Expenditure priorities have to be redefined. What is needed is a basic review of the existing functions, schemes and projects to weed out non-essential, non-productive and inefficient expenditure.
A disturbing feature is deficiency of staff in crucial areas such as public health, and schools despite huge expenditure on pay and allowances. The Finance Commission has referred to the need for consolidated information on the number of employees at each level with salary commitment. Outsourcing of functions as a means of cost reduction has not made much headway. It has also suggested reduction in the number of Centrally sponsored schemes.
The losses of State electricity boards are a big burden on Sate budgets. States' support mainly consists of direct subsidy, subventions, contribution to equity, direct loans and guarantees to loans raised by the boards. Aggregate impact on State budgets amounted to Rs.30,000 crore in 2007-08. The problems identified for remedial action are distribution and transmission losses, electricity theft, non-metering, and irrational power tariff.
The poor performance of State public sector undertakings is another major issue. The dividend was 0.18 per cent of equity and the interest payment to State budget 0.99 per cent of loans outstanding as at the end of 2007-08, far below the desired level of 5 and 7 per cent, respectively, recommended by the earlier Finance Commission. The issues for action are closure of non-working PSUs, getting out of areas not the direct concern of government, privatisation, disinvestment, more autonomy to units and improving the operational efficiency.
Other issues on the expenditure side are the use of output/outcome budgeting as a management tool for efficient budget implementation, targeting of subsidies, working of State road transport organizations, especially autonomy in tariff fixation, efficient utilisation of funds directly transferred by the Central Government to local bodies, reducing time and cost overruns in completing projects and transparency in budget and accounts on subsidies, off budget items and committed liabilities.
Areas need corrective action on the revenue side are large tax exemptions, loss in non-tax revenue due to implicit subsidy in providing services without recovering the operational cost (example: water charges from irrigation projects) and arrears in revenue collections.
To sum up, a Medium Term Fiscal Plan (MTFP) should be drawn up by States, reflecting a time bound action plan of reform of specific revenue and expenditure issues. There should be integration between MTPF and annual budgets. A special institutional arrangement is needed to monitor implementation of the MTFP. The Centre can use the leverage of annual financial assistance to ensure States follow the correct fiscal path. The Central Government credibility requires that it should first redraw a reform based on MTFP. Sustainable debt of the Centre and States is a vital requirement for the macroeconomic health of the economy.
