Rediff On The NeT Business News: RBI report confirms dismal finances of states


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February 3, 1999

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RBI report confirms dismal finances of states

The fiscal condition of the states is in a poor shape, which can be gauged by a rise in all major deficit indicators, the Reserve Bank of India has said in its Supplement -- Finances of State Governments -- 1998-99.

The article prepared by the RBI's division of fiscal analysis and department of economic analysis and policy says that this deterioration has taken place in spite of fiscal reforms undertaken by some states. The analysis is based on the study of finances of 25 state governments and Delhi.

The aggregate fiscal deficit for all states is budgeted at Rs 264.39 billion (1.6 per cent of GDP) during 1998-99, which is significantly higher than Rs 196.72 billion (1.4 per cent of GDP).

According to the RBI, the sharp deterioration in the states' revenue account has occurred due to deceleration in receipts and a sharp rise in expenditure. The expenditure of states on the revenue account is estimated to rise by 16.7 per cent in the current financial year as compared to 16.4 per cent in 1997-98.

''The nature of expenditure is also a cause of concern as the non- developmental expenditure in the revenue account is projected to absorb 47.70 per cent of the revenue receipts as against 40.9 per cent in 1997-98,'' says the article.

The gross fiscal deficit is expected to rise by 17.5 per cent to Rs 597.76 billion (3.7 per cent of GDP). The GFD would be financed to the extent of 48 per cent through loans from the Centre and the balance 52 per cent through the states' own capital receipts.

Revenue receipts of states are projected to decelerate on account of reduction in grants from the Centre, which would rise by 2.2 per cent in 1998-99 as against 19.6 per cent in the previous year. Many states are raising funds through mobilisation of small savings as they receive 75 per cent of net small savings collections.

As a result, accruals of loans against small savings would show a sharp rise of 25.2 per cent on top of a 47.5 per cent growth in the previous year.

The combined revenue receipts of all the states are budgeted to rise by 14.7 per cent in 1998-99, still lower as compared to a growth of 15.8 per cent in the previous year.

On their part, the state governments have initiated steps to address the long-term issues in revenue mobilisation, public sector undertaking reforms, disinvestment and investment inflows for developing infrastructure.

The fiscal consolidation policies of the states are based on four planks -- expenditure restructuring, expenditure management, resource augmentation and growth enhancing sectoral policies. The RBI noted that the internal debt and debt-servicing burden of the state governments has risen on account of diversion of part of capital receipts towards current expenditure.

However, on the flip side, continued thrust at fiscal reforms and ''unprecedented'' level of additional resources mobilisation measures have been attempted during the year.

The RBI has suggested that the states embark on the path of fiscal consolidation, incorporating expenditure restructuring, cuts in non-merit subsidies and increases in the user charges as major planks of action.

To enable the state governments to raise loans at competitive rates through auctions, they are provided flexibility in the market borrowings to the extent of 5 to 35 per cent of the allocated amount. They have been given the freedom to decide the timing and maturity of the borrowings. The Punjab government has raised Rs 600 million in January through the auction of a 10-year security at a weighted average yield of 12.39 per cent per annum.

The RBI has also mooted the idea of introducing a concurrent value-added tax at both Central and state levels as a step towards harmonising domestic trade taxation.

The country's central bank said that such an arrangement will accommodate the requirements of fiscal autonomy of the states and also revenue requirements of the Centre and bring about integration of the trade taxes.

Another suggestion advanced by the RBI for a harmonised VAT is that sales tax should be modelled on the destination principle of VAT leading to growth of the common market. However, the RBI has cautioned that VAT at the national level would divest the states of a major source of revenue.

Also, it would not be possible to get all trade taxation powers vested in the states and have only state VAT replacing both Central excise and sales taxes. ''A step towards VAT would be to levy sales tax on a retail basis as in Canada and the US."

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