state finances a study of budgets of...

STATE FINANCESA STUDY OF BUDGETS OF

2011-12

RESERVE BANK OF INDIAMARCH 2012

© Reserve Bank of India 2012All rights reserved. Reproduction is permitted provided an acknowledgement of the source is made.

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FOREWORD

The Reserve Bank of India has been publishing an annual report entitled “State Finances: A Study of

Budgets”, which provides an analytical discussion on fiscal position at the sub-national level and also

serves as primary source of disaggregated state-wise fiscal data. The report, which was historically a part

of the Reserve Bank’s Monthly Bulletin since 1950-51, is being brought out as a stand-alone publication

since 1999-2000 in order to improve its visibility to the public. With a view to improve access of historical

data on fiscal position of the States, the Reserve Bank brought together all the articles/studies on State

Finances from 1950-51 to 2010-11 in a Compendium CD, which was released in July 2011. The analysis,

orientation, coverage and format of the report have been restructured periodically to make it more

contemporary. Since 2005-06, the analytical content of the report has been enhanced by incorporating in

each issue, a special theme based on a specific issue of relevance. The special themes, which have been

covered so far in past studies, include ‘Outstanding Liabilities of State Governments’, ‘Social Sector

Expenditure’, ‘Fiscal Transfers to State governments’, ‘Revenue Receipts of State Governments: Trend

and Composition’, ‘Expenditure of State Governments: Trend and Composition’ and ‘Finance

Commissions in India: An Assessment’. Continuing this practice, the present report has taken up ‘Role of

the Reserve Bank in State Finances’ as its special theme.

The salient features that emerge from this report are as follows:

• The consolidated fiscal position of the States, after witnessing a deterioration in 2009-10, showed abroad-based improvement in 2010-11(RE), as States benefitted from growth-induced boost in tax

revenues as well as enhanced share in Central transfers in accordance with the Thirteenth Finance

Commission (ThFC) recommendations. This was reflected in an improvement in the fiscal position of

the States in terms of key deficit-GDP ratios. Development and social sector expenditures also

increased, indicating that the States resumed fiscal consolidation efforts without undermining the

quality of expenditure.

• The budgetary data for 2011-12 indicates the commitment of States to carry forward fiscal correction,as evident from the emergence of revenue surplus after a gap of two years and consequent reduction

in fiscal deficit-GDP ratio. Notwithstanding the improvement in the revenue account, the budgeted

fiscal deficit-GDP ratio for 2011-12 is higher than the recommended benchmark by the ThFC, mainly

on account of higher capital outlay during 2011-12.

• Notwithstanding the large crisis-driven market borrowings in 2009-10, consolidated debt-GDP ratio ofthe States continued its declining trend, which was further reinforced in 2010-11 following the revival of

the fiscal consolidation process. During 2011-12, consolidated debt-GDP ratio of the States is

expected to be much below the ThFC recommended benchmarks, both for the individual years as also

for the medium-term.

• The report highlights several other issues of concern such as structural factors hampering rule-basedfiscal correction for few States; fiscal transparency in the context of amended FRBM Acts; classification

of expenditure; central transfers and improving efficacy of centrally sponsored schemes; prudent

management of external borrowing of States; mounting losses in state power utilities; and the need for

greater disclosures of public private partnership at the State level for transparent assessment of

liabilities of the States.

The theme chapter ‘Role of the Reserve Bank in State Finances’, traces the growing responsibilities of

the Reserve Bank beyond its mandated roles of serving as a banker and debt manager of the State

governments. Besides extending banking services to all the States, the Reserve Bank has been

effectively balancing the short-term financing requirements of States consistent with its objective of

maintaining monetary stability. As a debt manager, the Reserve Bank has, over the years, created the

enabling conditions for States to switch over to a full-fledged auction system for market borrowings.

The Reserve Bank also played a pivotal role in facilitating rule-based medium-term fiscal

consolidation of the States and advising them on policy issues emerging from time to time to ensure

fiscal sustainability.

The report has been prepared in the Fiscal Analysis Division (FAD) of the Department of Economic

and Policy Research (DEPR) under the overall direction of Shri Deepak Mohanty, Executive Director

and under the guidance and supervision of Smt. Balbir Kaur, Adviser, by a team comprising Shri

Dhritidyuti Bose (Director); Smt. Deepa S.Raj and Shri.Neeraj Kumar (Asst.Advisers); and Shri

Dirghau Keshao Raut and Shri Prabhat Kumar (Research Officers). Shri P.P. Joshi, Shri A.K.

Dharampal, Shri B.A. Rankhambe and Smt. E. Fernandes provided support in the compilation of

data.

The Regional Offices of DEPR provided data inputs for the report. Support was also received from the

Department of Government and Bank Accounts (DGBA) and Internal Debt Management Department

(IDMD) of the Reserve Bank. The report benefited from cooperation of the Finance Departments of the

State governments, Ministry of Finance, Government of India, the Planning Commission and the Office of

the Comptroller and Auditor General (CAG) of India, New Delhi.

This report is also available on the RBI website (www.rbi.org.in). In order to improve the analytical or

information content of the report, feedback/comments are solicited. These may be sent to Director, Fiscal

Analysis Division, Department of Economic and Policy Research, Reserve Bank of India, Shahid Bhagat

Singh Road, Mumbai 400 001 or through email at [email protected].

Subir GokarnDeputy Governor

March 30, 2012

i

CONTENTSPage No.

Foreword

List of Abbreviations

Chapter I: Overview

1. Introduction ............................................................................................................. 1

2. Preview ................................................................................................................... 1

Chapter II: Issues and Perspectives

1. Introduction ............................................................................................................. 3

2. Fiscal Consolidation ................................................................................................ 3

3. Fiscal Transparency ................................................................................................ 5

4. Classification of Expenditure.................................................................................... 5

5. Central Transfers to States ...................................................................................... 6

6. External borrowings ................................................................................................. 9

7. Losses of State Power Utilities ................................................................................. 9

8. Public Private Partnership (PPP) at the State Level ................................................. 10

9. Conclusion .............................................................................................................. 12

Chapter III: Policy Initiatives

1. Introduction ............................................................................................................. 13

2. State Governments .................................................................................................. 13

3. Government of India ................................................................................................ 17

4. Reserve Bank of India ............................................................................................. 19

5. Conclusion .............................................................................................................. 19

Chapter IV: Consolidated Fiscal Position of State Governments

1. Introduction ............................................................................................................. 21

2. Accounts: 2009-10 .................................................................................................. 21

3. Revised Estimates: 2010-11 .................................................................................... 23

4. Budget Estimates: 2011-12...................................................................................... 23

5. Assessment ............................................................................................................ 28

6. Conclusion .............................................................................................................. 32

ii

Chapter V: State-Wise Analysis of Fiscal Performance

1. Introduction ............................................................................................................. 33

2. Deficit Indicators of the State Governments ............................................................. 34

3. Revenue Receipt of the State Governments ............................................................ 36

4. Expenditure Pattern of the State Governments ........................................................ 41

5. Budgetary Stance of States for 2011-12 vis-a-vis the ThFC Benchmark ................... 45

6. Conclusion .............................................................................................................. 47

Chapter VI: Outstanding Liabilities, Market Borrowings and Contingent Liabilities of State Governments

1. Introduction ............................................................................................................. 48

2. Outstanding Liabilities .............................................................................................. 48

3. State-wise Debt Position .......................................................................................... 51

4. Market Borrowings .................................................................................................. 53

5. Contingent Liabilities ............................................................................................... 54

6. Liquidity Position and Cash Management ................................................................ 56

7. Investment of Cash Balances .................................................................................. 56

8. Debt Consolidation and Relief ................................................................................. 57

9. Conclusion .............................................................................................................. 57

Chapter VII: Role of the Reserve Bank in State Finances

1. Introduction ............................................................................................................. 58

2. The Reserve Bank and State Finances: Legal and Institutional Underpinnings ........ 59

3. Evolving Role of the Reserve Bank in the Pre-reform period (1935-1990) ................ 61

4. Role of the Reserve Bank in the Post-Reform Period since 1990............................. 66

5. Impact of Reserve Bank’s role on State Finances: Overall Assessment ................... 76

6. Concluding Observations and the Way Forward ...................................................... 78

ANNEX 1

Amendments to the Fiscal Responsibility and Budget Management Acts -Deficit and Debt Targets .............................................................................................................. 81

Explanatory Note on Data Sources and Methodology ............................................................ 86

iii

LIST OF BOXES

II.1. Recommendations of the High Level Expert Committee on Efficient Managementof Public Expenditure ....................................................................................................... 7

II.2. Report of the Committee on Restructuring of Centrally Sponsored Schemes ................... 8

II.3. Report of the High Level Panel on Financial Position of Distribution Utilities – A Brief ....... 11

VI.1. Review of National Small Savings Fund (NSSF) .............................................................. 50

VII.1. Approaches to Sub-national Debt Management: Cross-country Experiences ................... 60

VII.2. Recourse to market borrowings by the State Government and Interest burden ................ 79

LIST OF TABLES

III.1: State-wise Measures to Contain Price rise in Administered Petroleum Products ............... 15

III.2: Institutional Reforms by State Governments..................................................................... 18

IV.1: Major Deficit Indicators of State Governments .................................................................. 21

IV.2: Variation in Major Items - 2009-10 (Accounts) over 2009-10 (RE) .................................... 22

IV.3: Variation in Major Items - 2010-11 (RE) over 2010-11 (BE) .............................................. 24

IV.4: Variation in Major Items - 2011-12 (BE) over 2010-11 (RE) .............................................. 25

IV.5: Aggregate Receipts of State Governments ...................................................................... 26

IV.6: Cost Recovery of Select Services .................................................................................... 27

IV.7: Expenditure Pattern of State Governments ...................................................................... 28

IV.8: Development Expenditure vis-à-vis Total Expenditure ...................................................... 28

IV.9: Trends in Aggregate Social Sector Expenditure of State Governments ............................ 29

IV.10: Expenditure on Social Services (Revenue and Capital Accounts) – Composition ............. 29

IV.11: State-wise Correction of RD and GFD - 2011-12 (BE) over 2010-11 (RE) ........................ 30

IV.12: Decomposition and Financing Pattern of Gross Fiscal Deficit - 2009-10(Accounts) to 2011-12 (BE) .............................................................................................. 30

IV.13: Budgetary Data Variation- State Budgets and Union Budget ............................................ 31

IV.14: Performance of the States vis-à-vis Thirteenth Finance Commission Assessment ........... 31

V.1: Fiscal Imbalances in Non-Special and Special Category States ........................................ 35

V.2: Deficit Indicators of State Governments ........................................................................... 36

V.3: Revenue Receipts of the State Governments ................................................................... 37

V.4: Revenue Expenditure of the State Governments .............................................................. 42

iv

V.5: Details of Committed Expenditure .................................................................................... 43

V.6: Development Expenditure: Select Indicators .................................................................... 46

V.7: Deficit Indicators in 2011-12: Comparison with ThFC Targets ........................................... 47

VI.1: Outstanding Liabilities of State Governments ................................................................... 49

VI.2: Composition of Outstanding Liabilities of State Governments ........................................... 51

VI.3: State-wise Debt-GSDP Position ....................................................................................... 52

VI.4: Interest Rate Profile of the Outstanding Stock of State Government Securities ................ 54

VI.5: Market Borrowings of State Governments ........................................................................ 54

VI.6: Maturity Profile of Outstanding State Government Securities............................................ 55

VI.7: Average Interest Rate on Outstanding Liabilities of State Governments ........................... 57

VII.1: Minimum Balances and Limits of WMAs .......................................................................... 64

VII.2: Salient Features of WMA Scheme of the State Governments .......................................... 68

LIST OF CHARTS

IV.1: Trend in Interest Receipts ................................................................................................ 26

IV.2: Composition of Committed Expenditure ........................................................................... 27

V.1: Revenue Receipts of States ............................................................................................. 38

V.2: Current Transfers from the Centre ................................................................................... 39

V.3: Composition of Revenue Receipts ................................................................................... 40

V.4: Value Added Tax in Non-special Category States ............................................................. 40

V.5: Value Added Tax in Special Category States .................................................................... 41

V.6: Pre-emption of Revenue Receipts by Committed Expenditure and Interest Payments ..... 44

V.7: Composition of Interest Payments in Non-special Category States - 2010-11 (RE) ........... 45

VI.1: Deficit, Debt and Interest Burden ..................................................................................... 49

VI.2: Utilisation of WMA and Overdraft by States (Average of daily outstanding) ....................... 56

VI.3: Investment in 14-day Intermediate and Auction Treasury Bills by the State Governments(Average of Friday outstanding) ....................................................................................... 56

VII.1: Outstanding WMAs and Invesment in Treasury Bills (as at end-March) ............................ 76

VII.2: GFD and its financing through market borrowings............................................................ 77

VII.3: Interest rates on market borrowings and NSSF loans ...................................................... 78

VII.4: Outstanding market loans, interest payments and surplus/deficit on the revenue account 78

v

LIST OF APPENDIX TABLES

1. Major Deficit Indicators of State Governments ......................................................... 91

2. Consolidated Budgetary Position at a Glance .......................................................... 92

3. Revenue Receipts ................................................................................................... 93

4. Revenue Expenditure .............................................................................................. 94

5. Capital Receipts ...................................................................................................... 95

6. Capital Disbursements............................................................................................. 96

7. Devolution and Transfer of Resources from the Centre ........................................... 97

8. Development and Non-Development Expenditure ................................................... 98

9. Development Expenditure - Major Heads ................................................................ 99

10. Non-Development Expenditure - Major Heads ......................................................... 100

11. Development and Non-Development Expenditure - Plan and Non-Plan Components 101

12. Development and Non-Development Expenditure - Revenue and Capital Components 102

13. Plan and Non-Plan Expenditure - Revenue and Capital Components ...................... 103

14. Non-Plan Non-Development Expenditure of States .................................................. 104

15. Composition of Social Sector Expenditure ............................................................... 105

16. Decomposition of Gross Fiscal Deficit ..................................................................... 107

17. Financing of Gross Fiscal Deficit ............................................................................. 108

18. Financing of Gross Fiscal Deficit - As per cent to Total ............................................. 109

19. Composition of Outstanding Liabilities of State Governments (As at end-March) ..... 110

20. Composition of Outstanding Liabilities of State Governments – As proportion toTotal (As at end-March) ........................................................................................... 111

21. State Government Market Borrowings ..................................................................... 112

LIST OF STATEMENTS

1. Major Fiscal Indicators ............................................................................................. 115

2. Revenue Deficit/Surplus .......................................................................................... 117

3. Conventional Deficit/Surplus .................................................................................... 118

4. Gross Fiscal Deficit/Surplus ..................................................................................... 119

5. Decomposition of Gross Fiscal Deficit ..................................................................... 120

6. Financing of Gross Fiscal Deficit - 2009-10 (Accounts) ............................................ 121

vi

7. Financing of Gross Fiscal Deficit - As per cent to Total - 2009-10 (Accounts) ........... 122

8. Financing of Gross Fiscal Deficit - 2010-11 (RE)...................................................... 123

9. Financing of Gross Fiscal Deficit - As per cent to Total - 2010-11 (RE) ..................... 124

10. Financing of Gross Fiscal Deficit - 2011-12 (BE) ...................................................... 125

11. Financing of Gross Fiscal Deficit - As per cent to Total - 2011-12 (BE) ..................... 126

12. Development Expenditure ....................................................................................... 127

13. Non-Development Expenditure ................................................................................ 128

14. Plan Expenditure ..................................................................................................... 129

15. Non-Plan Expenditure ............................................................................................. 130

16. Non-Plan Non-Development Expenditure ................................................................ 131

17. Interest Payments ................................................................................................... 132

18. Tax Revenue ........................................................................................................... 133

19. Own Tax Revenue ................................................................................................... 134

20. Non-Tax Revenue.................................................................................................... 135

21. Own Non-Tax Revenue ........................................................................................... 136

22. Share in Central Taxes ............................................................................................ 137

23. Grants from the Centre ............................................................................................ 138

24. Loans from the Centre ............................................................................................. 139

25. Devolution and Transfer of Resources from the Centre ........................................... 140

26. Composition of Outstanding Liabilities (As at end-March 2010-12) .......................... 141

27. Total Outstanding Liabilities of State Governments (As at end-March) ..................... 144

28. Total Outstanding Liabilities of State GovernmentsAs percentage of GSDP (As at end-March) ............................................................. 145

29. Markets Borrowings of State Governments .............................................................. 146

30. Plan Outlay of State Governments ........................................................................... 147

31. Capital Receipts and Capital Expenditure ................................................................ 148

32. State Government Market Loans ............................................................................. 149

33. Outstanding Market Loans of State Governments (As at end-March 2011) .............. 169

34. Maturity Profile of Outstanding State Government Securities(Outstanding as on March 31, 2011) ........................................................................ 170

35. Maturity Profile of Outstanding State Government Securities -As Percentage to total (Outstanding as on March 31, 2011) ..................................... 171

vii

36. Select Committed Expenditure of State Governments -As Ratio to States’ Own Revenue ............................................................................ 172

37. Select Committed Expenditure of State Governments -As Ratio to Revenue Expenditure ............................................................................ 173

38. Availment of WMA and Overdraft from the Reserve Bank........................................ 174

39. Ways and Means Advances from the Centre ........................................................... 175

40. Investment Outstanding in 14-day Intermediate Treasury Bills (As at end-March) .... 176

41. Expenditure on Education - As Ratio to Aggregate Expenditure ............................... 177

42. Expenditure on Medical and Public Health and Family Welfare -As Ratio to Aggregate Expenditure .......................................................................... 178

43. Outstanding Guarantees of State Governments (As at end-March) .......................... 179

44. Expenditure on Wages and Salaries ........................................................................ 180

45. Expenditure on Operations and Maintenance .......................................................... 181

46. Social Sector Expenditure ....................................................................................... 182

47. Social Sector Expenditure to Total Expenditure ........................................................ 183

APPENDICES

I. Revenue Receipts of States and Union Territories with Legislature ..................................... 187

II. Revenue Expenditure of States and Union Territories with Legislature ................................ 219

III. Capital Receipts of States and Union Territories with Legislature......................................... 281

IV. Capital Expenditure of States and Union Territories with Legislature ................................... 297

NOTE TO APPENDICES ............................................................................................................ 390

viii

List of Abbreviations

ATBs - Auction Treasury Bills

Avg. - Average

BE - Budget Estimates

BPL - Below Poverty Line

BOT - Build, Operate and Transfer Type

BOOT - Build, Own, Operate andTransfer

CAG - Comptroller and Auditor Generalof India

CCIL - Clearing Corporation of IndiaLimited

CD - Compact Disc

CE - Committed Expenditure

CO - Capital Outlay

CPSMS - Central Plan Scheme MonitoringSystem

CSF - Consolidated Sinking Fund

CSO - Central Statistics Office

CSS - Centrally Sponsored Schemes

CT - Current Transfer

DE/DEV - Development Expenditure

DvP - Delivery versus Payments

DSS - Debt Swap Scheme

DCRF - Debt Consolidation and ReliefFacility

DEPR - Department of Economic andPolicy Research

DGBA - Department of Government andBank Accounts

DRE - Development RevenueExpenditure

FC - Finance Commission

FIIs - Foreign Institutional Investors

FRBM - Fiscal Responsibility and BudgetManagement

FRLs - Fiscal ResponsibilityLegislations

GBS - Gross Budgetary Support

GDP - Gross Domestic Product

GFD - Gross Fiscal Deficit

GOI - Government of India

GR - Grants-in-aid

GRF - Guarantee Redemption Fund

GFS - Group of State FinanceSecretaries

GSDP - Gross State Domestic Product

GST - Goods and Services Tax

GSTN - GST Network

HLP - High Level Panel

IAS - Integrated Accounting System

IDMD - Internal Debt ManagementDepartment

IP - Interest Payment

IP-RR - Interest Payments-RevenueReceipts

ix

ITBs - Intermediate Treasury Bills

KVPs - Kisan Vikas Patras

MIS - Monthly Income Scheme

ML - Market Loans

MNSB - Multilateral Net SettlementBatch

NCT - National Capital Territory

NDRE - Non-Development RevenueExpenditure

NDS - Negotiated Dealing System

NFSB - National Food Security Bill

NIU - National Information Utility

NPS - New Pension Schemes

NSC - Non-Special Category

NSC - National Savings Certificate

NSDL - National Securities DepositoryLimited

NSS - National Settlement System

NSSF - National Small Saving Fund

OD - Overdraft

OMCs - Oil Marketing Companies

ONTR - Own Non-Tax Revenue

OTR - Own Tax Revenue

PD - Primary Deficit

PDs - Primary Dealers

PDS - Public Distribution System

PMIDC - Punjab Municipal InfrastructureDevelopment Company

PN - Pension

POSA - Post Office Savings Account

PPP - Public Private Partnership

PRB - Primary Revenue Balance .

PPF - Public Provident Fund

PRS - Primary Revenue Surplus

PSUs - Public Sector Undertakings

RE - Revised Estimates

RD - Revenue Deficit

RoL - Rest of Liabilities

RR - Revenue Receipts

RTGS - Real Time Gross SettlementSystem

SSA - Sarva Shiksha Abhiyan

SCs - Scheduled Castes

SC - Special Category

SCT - Share in Central Taxes

SDLs - State Development Loans

SEBs - State Electricity Boards

SGL - Subsidiary General Ledger

SCGS - Special Central GovernmentSecurities

SPVs - Special Purpose Vehicles

SPUs - State Power Utilities

SSA - Sarva Shiksha Abhiyan

SSE - Social Sector Expenditure

ST - Scheduled Tribe

TE - Total Expenditure

ThFC - Thirteenth Finance Commission

TwFC - Twelfth Finance Commission

UTs - Union Territories

VAT - Value Added Tax

WMA - Ways and Means Advances

1

IIIII Overview

1. Introduction

1.1 In 2011-12, the States announced their

budgets aimed at resumption of fiscal correction

process. The focus was more on expenditure control

against the backdrop of the rollback of fiscal stimulus

measures and the tapering off of the impact of the

Sixth Pay Commission Award. All States, with the

exception of Goa have amended their Fiscal

Responsibility and Budget Management (FRBM) Acts/

Rules. Under the amended Acts, the State

governments are aiming to eliminate revenue deficits

and to bring about gradual reductions in fiscal deficit

and debt levels latest by 2014-15, as was

recommended by the Thirteenth Finance Commission

(ThFC). While this augurs well for medium-term fiscal

sustainability of the States, the eventual fiscal

outcome would be shaped not only by the

macroeconomic conditions but also by the joint

commitment of the Centre and the States to

implement fiscal reforms in the pipeline. This report on

The consolidated fiscal position of the States/Union Territories is budgeted to improve in 2011-12 with a return to

surplus in the revenue account, reduction in fiscal deficit-GDP ratio and declining trend in debt-GDP ratio. This

trend is poised to continue with majority of the States amending their Fiscal Responsibility and Budget

Management Acts which map out graduated reductions in fiscal deficit and debt relative to their GSDPs over the

medium term. An analysis of the Reserve Bank’s contribution to finances of States over the years shows that, apart

from being a banker and debt manager of the States, the Bank has progressively played a greater role since the 1990s

as reflected in the formulation of model responsibility legislation for the States and advices given on fiscal

sustainability issues from time to time. As the States return to rule-based fiscal consolidation, they need to deal with

structural rigidities in their finances, focus on qualitative aspects of the correction process, undertake effective

expenditure management and address issues relating to State Power Utilities including their impact on State

finances.

“State Finances: A Study of Budgets of 2011-12”1 has

been prepared based on the data available in the

budget documents of 28 State governments, two

Union Territories with legislature, viz., NCT Delhi and

Puducherry.

2. Preview

1.2 The year 2011-12 is expected to bring an

improvement in fiscal position of the State

governments, as evident from budgeted target of

either a turnaround in their revenue accounts from

deficit to surplus or lower revenue deficits. The

consolidated budgetary position of the States shows a

revenue surplus (0.2 per cent of GDP) in 2011-12 (BE)

after a gap of two years (revenue deficits of 0.5 per

cent and 0.3 per cent of GDP in 2009-10 and 2010-11,

respectively). Consequently, the aggregate fiscal

deficit is budgeted lower at 2.2 per cent of GDP in

2011-12 (2.7 per cent and 2.9 per cent of GDP in 2010-

11 and 2009-10, respectively), though it remains

1 Prepared in the Fiscal Analysis Division of the Department of Economic and Policy Research (DEPR) with inputs from Regional Offices ofDEPR. Support was also received from Department of Government and Bank Accounts (DGBA) and Internal Debt Management Department(IDMD) of the Reserve Bank. The technical support received from Finance Departments of the 28 State governments, governments of NCTDelhi and Puducherry and valuable inputs received from the Ministry of Finance, Government of India, Planning Commission and office ofComptroller and Auditor General (CAG) of India, New Delhi are gratefully acknowledged.

2

State Finances : A Study of Budgets of 2011-12

higher than the Thirteenth Finance Commission’s

annual path. This is mainly on account of higher

capital outlay budgeted for 2011-12 while anchoring

the fiscal deficit-GDP ratio below 3 per cent.

1.3 The declining trend in outstanding debt-GDP

ratio, which was visible from end-March 2004 when it

had peaked (32.8 per cent), has continued through

end-March 2011 (RE) (23.5 per cent), and is budgeted

at 22.5 per cent for end-March 2012(BE). The debt-

GDP ratios are lower than the benchmarks for these

years and the medium term target of 24.3 per cent for

2014-15 recommended by the ThFC. This trend is

poised to continue with amended FRBMs of the States

setting out a graduated path of reduction in debt-

GSDP ratios for the respective States. The continued

emphasis on market borrowings for financing gross

fiscal deficit of State governments is reflected in the

shift in composition of the States’ outstanding

liabilities. There was, however, lower recourse to

market borrowings during 2010-11 after the crisis

years of 2008-09 and 2009-10, as the States reverted

to fiscal consolidation path and their cash balances

improved.

1.4 The Reserve Bank has been playing an

important role as banker and debt manager of the

States. Over the years, as a banker, while remaining

sensitive to growing requirements of the State

governments for short-term accommodation amidst

fiscal decentralisation, the Reserve Bank also

ensured short-term fiscal discipline by States,

consistent with its objective of maintaining monetary

stability. As a debt manager, the Reserve Bank’s

management of market borrowings of the States has

sequentially evolved from the traditional practice of

underwriting to administered system of pre-

determined notified amounts/coupons before

eventually migrating to a full-fledged auction system.

In the wake of fiscal stress of the States from the late

1990s, the Reserve Bank’s focus expanded beyond

its traditional functions as it provided inputs facilitating

the introduction and implementation of rule-based

medium-term fiscal consolidation at the State level.

The Reserve Bank also advised State governments in

framing policies related to fiscal sustainability issues

which emerged from time to time.

1.5 As the States embark upon the second phase

of a rule-based fiscal consolidation path, care needs

to be taken to address the structural rigidities in State

finances, improve disclosures for remaining alert on

qualitative aspects of fiscal correction, move towards

the proposed restructured public expenditure system

for better management of outlays for effective

outcomes, rationalise centrally sponsored schemes

for improving their effectiveness and address issues

relating to financial losses of the State Power

Utilities.

1.6 The Chapter-wise scheme of the report is as

follows. While this Chapter has provided an overview

of the report, the major issues relating to the finances

of the States in the current context are presented in

Chapter II. Chapter III highlights the major policy

initiatives undertaken by the State governments,

Government of India and the Reserve Bank of India.

Chapter IV provides an assessment of the

consolidated budgetary position of the State

governments. Fiscal performance across States is

covered in Chapter V. Chapter VI provides an analysis

and assessment of the debt position of the States,

including market borrowings and contingent liabilities.

Chapter VII focusses on the special theme, i.e., role of

the Reserve Bank in State finances. The consolidated

data on various fiscal indicators of 28 State

governments are covered in Appendix Tables 1-21,

while State-wise data are provided in Statements 1-47.

The detailed State-wise budgetary data are provided

in Appendix I-IV (Appendix I : Revenue Receipts,

Appendix II : Revenue Expenditure, Appendix III :

Capital Receipts, Appendix IV : Capital Expenditure).

3

II Issues and Perspectives

1. Introduction

2.1 As the second phase of rule-based fiscalconsolidation has commenced for the States from2011-12, the underlying emphasis should not only beon reverting to a sustainable fiscal path but also indrawing lessons from the past and developing newperspectives to address the key challenges. Inparticular, while the incentivised approach towardsfiscal correction should continue, there is a need toaddress the structural rigidities, especially for theStates which had missed out in the first phase ofimplementation of rule-based fiscal discipline. Greaterfiscal transparency is also critical for monitoring thequality, durability and effectiveness of fiscal correctionat the State level. The efficiency of expendituremanagement systems for the public sector as a wholeneeds to be improved for achieving desired outcomes.From the perspective of fiscal stability, deteriorationin the financial conditions of State Power Utilities(SPUs) may require a reassessment of the potentialimpact on State finances. With increasing recourseto public-private partnerships mode for projectfinancing, State governments need to recognise both

The State budgets for 2011-12 reflected a fiscal stance generally consistent with the fiscal roadmap laid down by the

Thirteenth Finance Commission. Although a majority of States have revised their FRBM Acts, most of them do not

include provisions for additional disclosures for enabling transparent assessment of their finances. The recommended

restructuring of public expenditure system envisages doing away with plan-non plan distinction of budgetary expenditures

for not only improving the efficiency of expenditure management but also for attaining desirable outcomes. There is

also a need to rationalise the operation of Centrally Sponsored Schemes to address the issues of lack of flexibility in these

schemes, counterpart funding shortage from the States and low utility of large number of schemes with thinly spread

resources at the field level. Financial losses of State Power Utilities continue to be a drag on the finances of States, which

necessitates not only renegotiation of debt liabilities of distribution utilities but also undertaking necessary reforms for

enabling independent functioning of State Electricity Regulatory Commissions and addressing issues relating to tariff

revisions. The State finances should also capture both explicit and implicit liabilities associated with certain off-budget

activities including project financing undertaken through SPVs/public-private partnership mode. There is also a need

for greater focus on structural issues which pose significant fiscal challenges, particularly for those States which could

not undertake rule-based fiscal corrections prior to the crisis years of 2008-09 and 2009-10.

explicit and implicit contingent liabilities in this regard.Against the backdrop of an uncertain global economicenvironment, prudent management of interest rateand exchange rate risks associated with externalloans (on back-to-back basis) poses a new challenge.This chapter raises key questions about the fiscalchallenges faced by the States and attempts toprovide an assessment on each of them.

2. Fiscal Consolidation

How does the budgetary stance of States for 2011-12 compare with the revised road map of fiscalconsolidation of the Thirteenth FinanceCommission? Are there some structural issueswhich still hamper rule-based fiscal correction forthe few States that missed it earlier?

2.2 The incentivised fiscal consolidation processfollowed by the State governments under thelegislative framework of Fiscal Responsibility andBudget Management (FRBM) prior to the global crisis,had enabled most of them to not only attain surplusesin their revenue account but also achieve impressivereductions in their fiscal deficits. With the disruption

4


in the fiscal consolidation process due to theexceptional circumstances of 2008-09 and 2009-10,the States needed to resume their fiscal consolidationprocess at the earliest. In this context, the ThirteenthFinance Commission (ThFC) had envisaged that theStates would be able to revert to their fiscalconsolidation path by 2011-12, allowing for a year ofadjustment in 2010-11.

2.3 According to the revised roadmap chalked outby the ThFC for the States, all non-special categoryStates that had attained balance/surplus in theirrevenue account in 2007-08 were to return to revenuebalance by 2011-12 and maintain it thereafter. TheseStates were also expected to achieve a fiscal deficitof 3 per cent of GSDP by 2011-12. The State budgetsof 2011-12 show that barring two States (Goa andHaryana), all other non-special category States, whichhad attained revenue balance in 2007-08, have eitherbudgeted for balance or surplus in their revenueaccounts for 2011-12. The GFD-GSDP ratio wasbudgeted to be within the stipulated 3 per cent for allthese States except Goa and Jharkhand.

2.4 The ThFC had recommended a separateadjustment path for three States (Kerala, Punjab andWest Bengal) which had revenue deficits in 2007-08,so as to eliminate the same by 2014-15.2 While thebudgeted revenue deficit to GSDP (RD-GSDP) ratiofor 2011-12 is higher than the ThFC target in the caseof Kerala, it is lower than the target for Punjab. WestBengal’s budgeted RD-GSDP ratio for 2011-12 is inline with the ThFC target. While the budgeted GFD-GDP ratios for Kerala and West Bengal for 2011-12are within their respective ThFC targets, the budgetedGFD-GDP ratio for Punjab was marginally higher thanthe target.

2.5 Non-attainment of the revenue account

targets by Kerala and Punjab precluded these States

from being granted debt relief (which is linked to

progressive reduction in their revenue deficit) from

2008-09, although they continued to get interest relief

from the Centre. As West Bengal had not enacted

its fiscal responsibility legislation at the time, it was

not entitled to avail the benefit under the debt waiver

scheme, thereby losing out on both debt relief as

well as interest relief from the Centre. The basic

problem of the finances of West Bengal lay in its

own tax revenue (OTR)-GSDP ratio which was

substantially lower than that of other States. Apart

from not being able to fully reap its revenue potential

(with inadequate stamp and registration duty

collections even during real estate boom phases),

the low mobilisation of OTR reflected a lower tax

base or per capita income and lower potential for

certain tax collections, particularly in respect of motor

vehicles, whose number stood lower than that of

other States like Andhra Pradesh with a comparable

population size. Consequently, growth in West

Bengal government’s revenues could not match its

expenditure growth. In the case of Kerala, pensions

and salaries continue to be one of the main drivers

of revenue expenditure. Pension expenditure is also

high in the State for two reasons viz., (a) the lower

stipulated age of retirement than the other States

(b) the non-introduction of the new pension scheme

(NPS). While the State has constituted a cabinet sub-

committee to examine the issue of raising the

retirement age of its employees on par with the other

States, no decision has yet been taken on the NPS.

In the case of Punjab, although its own tax and non-

tax revenues in terms of GSDP compare well with

the respective national averages, the revenue

expenditure-GSDP ratio is higher than the national

average. The average share of development

expenditure in total expenditure is significantly lower

than the national average as the State is weighed

down by high committed expenditure. In terms of

interest payments-revenue receipts ratio, Punjab

2 Of these three States, Kerala and Punjab had enacted their FRBMs in 2003 and West Bengal did so only in 2010. Under their FRBM Acts/Rules, Kerala and Punjab were to achieve revenue balance by 2006-07.

5

Issues and Perspectives

ranks the second highest in the country. Concerted

efforts are being taken by the three States to improve

their fiscal positions and their progress is being

monitored by the Central government.

2.6 To address the problem of interest rateasymmetry between the Centre and the States withregard to loans to the States from the National SmallSavings Fund (NSSF), the ThFC hadrecommended that the interest rate of NSSF loanscontracted by the States t i l l 2006-07 andoutstanding at the end of 2009-10 be reset at acommon interest rate of 9 per cent in place of theexisting 10.5 per cent/9.5 per cent. A State will beconsidered eligible for this interest relief from thedate of amendment/enactment of FRBM inaccordance with the recommendation of the ThFC.The Union Budget for 2012-13 proposed that from2012-13 onwards, the States will be eligible forprovisional relief, based on compliance with thefiscal targets in their respective FRBM Acts, asreflected in their Budget Estimates. If a State, aftergetting the interest relief, breaches the FRBM inActuals (as per Finance Accounts), the benefit ofreduced interest on NSSF loans will be withdrawnand the earlier interest rate will become applicable.This excess interest relief availed by the State shallbe recovered in the next year. The State may revertto 9 per cent interest rate as and when it complieswith its FRBM targets again.

3. Fiscal Transparency

What disclosure and dissemination requirementsin State Budgets do amended FRBM Acts entail?

2.7 The ThFC had stipulated that States amend/enact their FRBM Acts, incorporating the targets setby it as a pre-condition for the release of all State-specific grants and debt relief measures. So far, 27States have amended their FRBM Acts/Rules settingout annual deficit and debt ceilings in terms of GSDPin accordance with the path set out by the ThFC. Asthe GSDP series has been revised after the release

of the ThFC report, the series used by the ThFC toarrive at its targeted ratios are not comparable withthe deficit/debt to GSDP ratios worked out on the basisof the new GSDP series. There is, therefore, a needto develop an appropriate measure that is consistentwith the ThFC recommendation to monitor adherenceto the FRBM targets.

2.8 While amending their FRBM Acts/Rules, mostStates have confined themselves to the minimumrequirement of specifying annual deficit/debt limits asstipulated by the ThFC. The ThFC had alsorecommended that all States incorporate the settingup of an independent review/monitoring mechanismin their FRBM Acts. It had also suggested that Statesshould attempt to incorporate statements on revenueconsequences of capital expenditure, public-privatepartnerships (PPP) and related liabilities, physical andfinancial assets and vacant public land and buildings.Only two States (Karnataka & Arunachal Pradesh)have included these disclosures within the ambit oftheir amended FRBM Acts/Rules. Other States couldfollow this example and increase their disclosures toenhance fiscal transparency. In this context, it is alsoimportant that the States provide information onspecial purpose vehicles (SPVs) floated by them witha view to enhancing fiscal transparency.

4. Classification of Expenditure

What is the rationale to do away with the Plan andnon-Plan distinction for classifying budgetaryexpenditures?

2.9 The distinction between Plan and non-Planexpenditure has, over the years, rendered the entirebudgeting exercise complex and made outcome-based budgeting difficult. The classification of revenueexpenditure and capital expenditure also requires afresh look in the post-FRBM scenario in view of theneed for substantial resource transfers to States andlocal bodies. The transfer of Central resources toStates through various types of schemes and multiplemodes of transfer have posed problems in obtaining

6


a comprehensive overview of transfers to the States

as well as in effective monitoring of expenditure. There

are also issues concerning the accountability of funds

directly transferred to implementing agencies in the

States. The Eleventh Plan document also referred to

innovative methods of financing projects such as

PPPs and new administrative mechanisms of

implementation. In this context, the scope of the public

sector plan needs to be clarified. To address these

issues, the Planning Commission set up a High Level

Expert Committee to suggest measures for the

efficient management of public expenditures

(Box II.1).

2.10 The Committee’s recommendation to do away

with Plan-non Plan distinction in budgetary

classification of expenditures envisages not only

efficient management of full expenditure which

envelopes various functions/sectors/services but also

helps in proper linking of outlays to outcomes. This

would enable transparent assessment of both costs

and outcomes achieved under various categories of

expenditure. Successful migration to the new system

would, however, entail that the new classificatory

expenditure structure gets assimilated across the

government machineries at all levels including the

roles to be played by the Ministry of Finance, the

Planning Commission, administrative ministries and

the State governments. Since the present system of

plan-non plan classification plays an important role

in determining grants-in-aid to the States

recommended by the Finance Commission (FC),

merging the plan and non-plan categories of

expenditure would also require a change in

assessment mechanism of the FC.

5. Central Transfers to States

How can the efficacy of Centrally SponsoredSchemes be improved?

2.11 States are primarily responsible for major

sectors such as health, education and employment

which often involve large public expenditures.

Recognising the higher resource requirements of the

States relative to their resource-raising capacity, the

Constitution mandates statutory transfers of tax and

grants from the Central government to the State

governments in accordance with the Finance

Commission awards. In addition, States also have

access to central Plan funds through centrally

sponsored schemes (CSS) and central assistance

to State Plans. The CSSs are operationalised by

Central ministries based on scheme-specific

guidelines and are implemented by State

governments or their designated agencies. The

Central assistance to State Plans has two

components, viz., normal Central assistance and

additional Central assistance for externally aided

projects and for special programmes based on

specific criteria and guidelines. Grants from the

Centre to the States as a proportion of total revenue

receipts of the States increased from 16.8 per cent

in the 1990s to 17.3 per cent during 2000-2010,

primarily during the second half of the decade (18.3

per cent) on account of higher non-Plan grants under

the Twelfth Finance Commission award as well as

higher transfers under State Plans and CSS.

2.12 The proliferation of CSS and the need for

counterpart funds has led to the pre-empting of

the State government resources from their Plan

priorities. In several cases, it has also led to

difficulties in accessing CSS funds due to the

shortage of counterpart funds from the States.

States, particularly Bihar and Jharkhand and the

North-eastern States, have often represented that

they have resource constraints and are not able

to provide their share to enable them to access

the required funds under CSS. This is particularly

important for schemes such as Sarva Shiksha

Abhiyan (SSA) where the counterpart funds are

required to be provided to the extent of 35 per cent

and the sector is cr i t ical for every State.

7


In response to the conceptual issues relating to plan financingraised in the Eleventh Plan document, the Planning Commissionconstituted a High Level Expert Committee on EfficientManagement of Public Expenditure (Chairman: Dr. CRangarajan). The Committee submitted its report in July 2011.The Committee has recommended that while the process ofpreparing Five Year Plans may be continued, the distinctionbetween Plan and non-Plan expenditure may be removedfrom the budgets of the Union and State Governments topresent a more holistic view of expenditure rather than thepresent segmented view. Other recommendations of the Groupinclude:

• One-to-one correspondence between the annual budgetarycomponent of the plan of the Centre and States andthe government budgets of the Centre and States,respectively.

• A shift in the budgeting approach from a one-year horizon toa multi-year horizon and from input-based budgeting tooutputs and outcomes.

• Changes in organisational structure, mandates andprocesses as well as appropriate interventions in humanresource development and information technology in orderto accommodate the shift to holistic view of expenditure.

• Defining and delineating the role of the Ministry of Finance,the Planning Commission, administrative ministries and theState governments.

• Changes in the Annual Budget process.

Comprehensive Framework of Transfers to States

• A new multi-dimensional budget and accounting classificationto present a comprehensive view of Central transfers toStates.

• The proposed classification to provide uniform codes forcentral programmes, sub programmes and schemes beingimplemented in the States.

• The Central Plan Scheme Monitoring System (CPSMS) tobe extended to enable tracking of expenditure for all centralschemes using both treasury route and society route. Thismay require interface of CPSMS with core banking solutionsof banks, systems of State treasuries and accountant generaloffices.

• Empowering citizens with information on the flow of resourcesand their utilisation through a portal, thereby promotingtransparency and accountability.

Box II.1: Recommendations of the High Level Expert Committee on Efficient Management of Public Expenditure

Accounting Concerns Arising from Direct Mode of Transfer

• The treasury mode of transfer of Central Plan fund isrecommended.

• A suitable accounting methodology to be worked out byController General of Accounts (CGA) and Comptroller andAuditor General (CAG) to distinguish between finalexpenditure and transfer.

• The switchover to complete treasury mode may be madefrom the Twelfth Five-Year Plan for all new schemes, with ashort transition period to allow for necessary adjustments tothe existing schemes.

• Until the switchover is complete, accounting and submissionof utilisation certificate under society mode to be rationalised.

Revenue / Capital Classification

• Revenue-capital classification to be continued. Capitalexpenditure should relate to creation of assets and bedetermined by ownership criteria.

• While all transfers should be treated as revenue expenditurein accounts, the merit of classifying revenue expenditure byend-use is also considered for FRBM compliance and grantsfor creating assets may be classified as capital grant.

• An adjusted revenue deficit is recommended only for thepurpose of FRBM compliance. FRBM may require someamendments to allow for adjusted revenue deficit.

Scope of Public Sector Plan

• The Central or State Plan should continue to includeinvestment outlays (funded by internal and extra budgetaryresources) of Central public sector enterprises and Statespublic sector enterprises, respectively. Consolidatedinformation on the resources and expenditure of rural andurban local bodies may be provided as a special supplementto the budgets.

• The budgets and accounts of the implementing agenciesshould be shown as a supplement to the Budgets till fundsare transferred through direct route.

• As regards public-private partnership (PPP), the annuitycommitments may form a part of committed expenditure ofthe budget of the concerned Ministry/Department and annuitypayments may be treated as capital expenditure.

• Viability gap funding is a grant provided to concessionaire ofthe PPP projects and may be treated as capital grant.

• There should be supplements to the budgets providingproject-wise, ministry-wise and sector-wise information onthe PPPs.

Simultaneously, it is also important to ensurethat States have adequate financial participationto ensure a sense of ownership of the scheme. It

has been argued that if 100 per cent grants comefrom the Central government, ownership getsdiluted.

Source : Report of the High Level Expert Committee on Efficient Management of Public Expenditure, Planning Commission, Government of India,July 2011.

8


2.13 Other issues of concern to policy makers and

implementing agencies over the years include lack

of flexibility, accountability, enforceability and

implementation. To address some of these concerns,

the Planning Commission had constituted a sub-

committee to look into the restructuring of CSS to

enhance its flexibility, scale and efficiency. The

Committee has recommended that the inter-

distribution amongst States needs to be based on

equitable notified criteria. It has also recommended

that the linkage between Centre and State funding

needs to be kept in mind while devising the criteria

for distribution (Box II.2).

2.14 The ThFC had recommended that Central

loans to States for CSS/Central Plan schemes

through ministries other than the Ministry of Finance

that were outstanding at the end of 2009-10 be

written off. Accordingly, the Central government

would be writing off the outstanding debt under these

schemes amounting to around `21 billion during

2011-12.

The Central government has over the years introduced severalcentrally sponsored schemes (CSS) in areas that are nationalpriority such as health, education, agriculture, skill development,employment, urban development and rural infrastructure. Severalof these sectors fall within the sphere of activity of the Stategovernments. States have been raising concerns at variousforums about lack of flexibility in these schemes, the adverseimplication of counterpart funding requirement of CSS on Statefinances and the questionable utility of operating large numberof CSS with thinly spread resources at the field level. To considerthe concerns of all stakeholders, the Planning Commissionconstituted a Sub-Committee in March 2011 (Chairman: ShriB.K. Chaturvedi) to suggest restructuring of CSS to enhance itsflexibility and efficiency. The main recommendations of the Sub-Committee which submitted its report in September 2011 aregiven below.

• CSS with an average annual outlay of less than `1 billion(which at present accounts for 44 per cent of the total CSS)should either be weeded out or merged for convergence withlarger sectoral schemes or alternatively be transferred tothe States, which can then continue with these schemesbased on their requirements.

• The existing CSS should be restructured into threecategories, viz., (a) flagship schemes which will addressmajor national interventions required on education,health, irrigation, urban development infrastructure, ruralinfrastructure, skill development, employment and otheridentified sectors, (b) major sub-sectoral schemes toaddress developmental problems in sub-sectors of majorsectors like agriculture, education and health, and (c) sectorumbrella schemes, which will address the sectoral gaps tohelp improve effectiveness of Plan expenditure. Suchrestructuring will reduce the total number of schemes from147 to 59.

Box II.2: Report of the Committee on Restructuring of Centrally Sponsored Schemes

• The distribution of CSS funds amongst different States shouldbe based on transparent notified guidelines that should beput on the website of the concerned ministries. To incentivisethe States to provide larger funds for certain sectors such ashealth, education, urban development, skill development andrural infrastructure, 50 per cent increase in the budget amountof the Central government department will be distributedamongst those States that have provided for an increase intheir budget over the previous year in the concerned sector(excluding Central CSS/ACA funds).

• New CSS should focus only on major interventions requiredby national development needs. Such schemes should beflagship schemes (Category-I) and have a minimum Planexpenditure of `100 billion over the five-year Plan period.New schemes less than this stipulated minimum should eitherbe part of the major sub-sectoral schemes (Category-II) orsector umbrella schemes (Category-III).

• The normal Central assistance to States should not bereduced to below 10 per cent of gross budgetary support(GBS) to enable States to have adequate, flexible and untiedresources for their Plans.

• To enable State governments to meet their special needs,the design of CSS should be flexible and 20 per cent of budgetallocation in all the CSS (10 per cent in flagship schemes),to be called ‘Flexi Funds’, should be earmarked in eachscheme for this purpose.

• The evaluation of the CSS may be done by (a) professionalinstitutions; (b) visits of experts to major project implementingStates; (c) other individual experts by field visits. In addition,sample surveys may be carried out in selected States acrossthe country to assess the impact and outcomes of theindividual CSS. The Planning Commission should prepare alist of organisations that can conduct such monitoring andevaluation in States.

Source : Report of the Committee on Restructuring of Centrally Sponsored Schemes, Planning Commission, Government of India, September 2011.

9


6. External Borrowings

Why do States need to give special attention totheir foreign currency denominated debt?

2.15 State governments cannot access external

sources of finance directly. Based on the

recommendation of the Twelfth Finance Commission,

transfer of external assistance to non-special category

States is being made on a ‘back-to-back’ basis3

from April 1, 2005. For special category states (North-

east States, Uttarakhand, Himachal Pradesh, and

Jammu and Kashmir), external borrowings are in the

form of 90 per cent grant and 10 per cent loan from

the Central government.

2.16 The present arrangement entails the exposure

of States to uncertain movements in both international

interest rates on which the lending agencies

benchmark their interest and currency exchange

rates. As per the ‘back-to-back’ loan transfer

arrangement, States have to bear the currency risk

since principal repayments and interest payments on

such loans to external agencies are denominated in

foreign currencies. In case of significant rupee

depreciation, larger provisions may be required to

meet debt service obligations that may negatively

impact the fiscal health of the State concerned. Three

States (Andhra Pradesh, Tamil Nadu and Madhya

Pradesh) accounted for over half the outstanding

loans denominated in foreign currency as on February

29, 2012, with Andhra Pradesh alone accounting for

over one-fifth.

2.17 The recent increase in global uncertaintieshas raised both interest rate and exchange rate risks,with the latter assuming more serious proportions inthe light of the sharp depreciation of the rupee in theduring September – December 2011. This underlinesthe need for capacity building by the Stategovernments to ensure that debt denominated in

3 Passing loans from bilateral and multilateral sources on ‘back-to-back’ basis to State governments implies that States face identical terms andconditions (including concessional interest rates, grace period, maturity profile, commitment charges and amortisation schedules) as is facedby the Central government.

foreign currency is prudently managed. The currencyrisk needs to be factored in while weighing the costsof domestic borrowing vis-a-vis that of externalborrowing.

7. Losses of State Power Utilities

What are the factors affecting financial conditionsof power utilities and how do they impact StateFinances?

2.18 A growing area of concern for the States isthe significant increase in financial losses of the Statepower distribution utilities which carry both a directas well as an indirect burden on the finances of Stategovernments. Besides budgetary support to the SPUsthrough subsidies, grants and loans, the States alsoextend guarantees for loans taken by the powerutilities from financial institutions. SPUs are makinghuge cash losses due to non-revision of tariffs overextended period of time on the one hand, and non-realisation of subsidies from the State government,on the other. The deterioration in financialperformance of SPUs is expected to have significantimplications for the finances of States.

2.19 Power sector reforms and the unbundling ofpower utilities have not had the desired impact onthe financial position of the power utilities or the Stategovernments. Subsidies to SPUs/State ElectricityBoards (SEBs), which have been rising over the years,were high in 2009-10 for Gujarat and Karnataka whichhad unbundled utilities as well as for Tamil Naduwhere the power utilities had remained in bundledform until 2009-10. Net loans to SEBs/unbundled

SPUs were high for Madhya Pradesh, Bihar and

Jharkhand. Only a few States separately reported

guarantees extended to SPUs.

2.20 The gap between the average cost of supply

and average revenue (with and without subsidy)

realised has widened in several States as the tariff

10


revisions to close the gap do not take place regularly.

Pending tariff revisions, the SPUs resort to borrowing

from banks and financial institutions to cover their

losses. The accumulated borrowings and interest

payments add substantially to the average cost of

supply and create further pressure on the financial

position of the SPUs. The non-payment of subsidy to

SPUs by some State governments also complicates

the situation. Although the share of loans from the

States as a proportion of total borrowings of the power

utilities and subsidy realised (subsidies received as

a proportion of subsidies booked) have been declining

in recent years, the increase in State government

guarantees to these utilities has increased the

contingent liabilities of the States.

2.21 As SPUs have increasingly financed their

losses through short-term borrowings from banks and

other financial institutions, these borrowings have

assumed alarming proportions. In this context, the

Planning Commission had appointed a High Level

Panel (HLP) on ‘Financial Position of Distribution

Utilities’ in July 2010 to look into their financial

problems and to identify corrective steps. According

to the report submitted by the HLP in December 2011,

over 70 per cent of the accumulated loss (adjusted

for subsidy) of `820 billion of the distribution utilities

between 2005-06 and 2009-10 was financed by public

sector banks, 42 per cent of which was backed by

State government guarantees. The cushion available

in the form of States’ guarantee redemption funds at

`40 billion to meet the commitment arising from

possible default is grossly inadequate. The HLP has

made several recommendations which inter alia

include setting up of a special purpose vehicle to

address the issue of repayment default by SPUs

(Box II.3).

2.22 Arrears on subsidy are not captured in the

State Budgets as the budgets follow cash accounting

as opposed to accrual-based accounting. Information

on unpaid subsidies, loans extended against State

government guarantees/letters of comfort as also

guarantees invoked, if any, should be transparently

reported by the State governments.

8. Public Private Partnership (PPP) at the StateLevel

With policy emphasis on removing bottlenecksand incentivising the implementation of PPPprojects, what disclosures should the States makefor transparent assessment of the associatedliabilities?

2.23 Recourse to the PPP mode for project

financing is generally encouraged because it frees

valuable fiscal space for the provision of public

goods in areas where such financing may not be

forthcoming. PPP projects in sectors that come

under the purview of the State governments such

as urban amenities, State highways and minor

ports have increased in recent years. Some States

like Maharashtra, Andhra Pradesh, Karnataka and

Gujarat have undertaken far more PPPs than

others. While there has been a concentration of

PPPs in the road sector across the States, there

is greater diversity of PPP projects in certain States

like Andhra Pradesh where, besides roads, PPPs

cover sectors such as education, energy, forestry,

health, information technology, minor ports,

tourism and urban development. In terms of themain types of PPP contracts, almost all contractshave been of the build, operate and transfer (BOT)type or build, own, operate and transfer (BOOT)type (either toll or annuity payment models) orclose variants.

2.24 With a view to incentivising PPP, theGovernment of India has formulated the draft PublicPrivate Partnership (Preparation, Procurement andManagement) Rules, including rules for regulatingexpenditure, appropriation of revenues, andcontingent liabilities in PPP projects and proposeddelegation of powers in this regard. The draft ruleshave been placed on the website for widerconsultation with the stakeholders.

11


The Planning Commission had appointed in July 2010 a HighLevel Panel (HLP) under the Chairmanship of Shri V.K. Shunglu,former Comptroller & Auditor General, to look into the financialproblems of State Electricity Boards and to identify correctivesteps. The terms of reference of this Committee includedreviewing the accounts of state electricity boards and statedistribution companies as at end-March 2010 and to project theirlosses by 2017; reviewing the electricity tariff and examining therole of the State governments, Electricity RegulatoryCommissions and distribution companies in periodic tariffrevisions; assessing system improvement measuresaccomplished in distribution of power and recommending a planof action to achieve financial viability in distribution of power by2017. The HLP presented its report to the Deputy Chairman,Planning Commission on December 15, 2011. The salientfeatures of the Report are as follows :

• The accumulated losses of the distribution utilities during2005-10 amounted to `820 billion after subsidy, of whichnearly a third was incurred in 2009-10 alone.

• These losses are primarily on account of poor managerialand operational practices of distribution companiescompounded by irrational tariffs fixed by regulators. Therewas a gap of about `0.60/kwh between average cost andrevenue realised.

• Around 70 per cent of the financial losses of distributioncompanies during the past five years has been financedthrough loans from public sector banks. Of the total bankloans outstanding at `585 billion, only 42 per cent is backedby government guarantees.

• Recognising the limited scope for borrowings by the Stategovernments to meet the debt obligations of distributionutilities to public sector banks, the HLP has suggested thatto start with, banks need to jointly re-negotiate withdistribution utilities/State governments the outstandingamount as also the recovery schedule taking into accountthe reform measures likely to be initiated by the distributionutilities and State governments. It is also suggested that theReserve Bank should allow State governments to draw downthe amount available in guarantee redemption funds (`40

Box II.3: Report of the High Level Panel on Financial Position of Distribution Utilities – A Brief

billion) to meet the liabilities of distribution companies tobanks which are guaranteed by them.

• To address the issue of repayment default despite bestefforts, it is suggested that a Special Purpose Vehicle (SPV)be set up for purchasing the loans of public sector banks todiscoms, subject to several conditions which, inter alia,include periodic tariff revisions. However, if it is subsequentlyfound that repayment default to banks occurred for reasonswhich were under the control of the distribution utility, theSPV mechanism would still be used to repay the bank butwould entail concomitant debit of the account of theconcerned State government with the Reserve Bank.

• It is recommended that 76 per cent of the share capital ofthe SPV would be held by the Reserve Bank while the PowerFinance Corporation and the Rural Electrification Corporationwould hold the balance. The Reserve Bank is also expectedto extend a line of credit to the SPV.

• State Electricity Regulatory Commissions should be madeindependent financially as well as in their functioning. Theselection of Chairman and members of Electricity RegulatoryCommissions needs to be fine-tuned and further, theirfunctioning should be scrutinised by an Expert Group todetermine to what extent the Commissions have dischargedtheir statutory duties such as timely and regular revision oftariffs.

• In areas where losses are high, a loss surcharge should beimposed over and above the basic tariff.

• Other recommendations include introducing input-basedfranchise models in about 255 more towns as listed in theReport, the cautious use of Section 108 of the ElectricityAct, 2003 relating to the issue of policy directions and properenergy accounting of all consumers.

• Distribution losses are projected to decline from around ̀ 280billion in April 2010 to around ̀ 220 billion at end-March 2017.These projections are based on a number of assumptionsincluding the expectation that States will make concertedefforts to eliminate losses and that commercial losses wouldbe substantially reduced by the end of the third year of theTwelfth Five-Year Plan.

2.25 As noted by the ThFC, PPPs create explicitand implicit obligations of the public entity that isinvolved in them. While explicit contingent liabilitiesin the form of stipulated annuity payments over amulti-year horizon may be spelt out, implicitcontingent liabilities are obligations to compensatethe private sector partners for contingencies suchas changes in specifications, breach of obligations

and/or early termination of contracts which may bedifficult to quantify. As recommended by the ThFCfor the Central government, there is also a needfor the States to quantify expenditure obligationsrelating to PPP projects in their medium-term fiscalpolicy statements with an increasing number ofthem adopting the PPP mode of projectimplementation.

Source : Report of the High Level Panel on Financial Position of Distribution Utilities, Planning Commission, Government of India, December 2011.

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9. Conclusion

2.26 The budgeted fiscal stance of the Stategovernments during 2011-12 is generally inconsonance with the revised road map of the ThFC.There is, however, a need to deal with the differentstructural constraints, particularly for States whichcould not achieve fiscal consolidation. The strategytowards integrated management of the overallexpenditure enveloping various functions of thegovernment for facilitating desired outcomes, as

recommended by the High Level Expenditure

Committee on Public Expenditure, is welcome.

Successful restructuring of the public expenditure

management system would, however, call for

appropriate assimilation of the new system across

the government machineries at all levels. An important

fiscal challenge for the States is significant increase

in financial losses of the State power distribution

utilities which carry both direct and indirect burden

on the finances.

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III Policy Initiatives

1. Introduction

3.1 Presented against the backdrop of bettereconomic growth performance in 2010-11, the Statebudgets for 2011-12 indicated the intent of the Stategovernments to continue their progressive exit fromthe expansionary fiscal policy of the crisis years (2008-09 and 2009-10). On the revenue side, the focus hasbeen on tax enhancing measures while measuressuch as exemption/reduction in value added tax (VAT)rates on food and petroleum products and exciseduties on petroleum products have been announcedto tackle the situation of price rise in essentialcommodities. On the expenditure side, besidesincreasing expenditure on food security andstrengthening the PDS, States have proposed higherallocations for various Plan schemes (Centrallysponsored schemes and State plan schemes),particularly relating to education, health,transportation, housing and employment generation.Some States have announced the creation of physicaland human infrastructure such as roads and bridgesand health care services on a public-privatepartnership (PPP) basis. This Chapter brieflydiscusses policy initiatives and schemes that havebeen proposed by State governments, theGovernment of India and the Reserve Bank of India,which impinge on State finances.

In line with the recommendations of the Thirteenth Finance Commission (ThFC) supported by a revival of growth

in 2010-11, State governments announced various policy measures in their budgets for 2011-12. The emphasis

appears to be on mobilising higher own revenue receipts through various tax measures, while specific policy measures

have been announced to address the rise in prices of essential commodities and petroleum products. Many States have

accorded priority to strengthening the public distribution system, which has been supplemented by tax exemptions/

reductions for foodgrains and certain essential commodities. The policy announcements in the State budgets also

cover specific initiatives aimed at developing social and economic sectors and also promote infrastructure developement

on a PPP basis. The States and the Centre have also tried to create an environment for effective implementation of

the proposed Goods and Services Tax in the near future. The States have introduced amendments to their original

Fiscal Responsibility and Budget Management Acts, setting out targets for their fiscal indicators in pursuance of

the revised fiscal roadmap recommended by the ThFC.

2. State Governments

3.2 The broad thrust of policy proposalsannounced in State budgets for 2011-12 is to continuethe fiscal consolidation process which was re-startedin 2010-11, in line with the recommendation of theThirteenth Finance Commission (ThFC).

Revenue Measures

3.3 Policy measures are broadly aimed ataugmenting tax revenues. While some of the Stateshave desisted from implementing any new taxmeasures by declaring their budgets as ‘tax-free’budgets, others have gone in favour of expanding thetax base as well as increasing the rates of taxation.The broad fiscal stance of the States has beentowards enhancing their own tax collections whilecontinuing with their existing pattern of expenditures.The major tax policy initiatives include (i) increasingthe VAT rate on certain commodities such as tobaccoand allied products (Assam, Gujarat, Goa, Jammuand Kashmir, Meghalaya, Delhi), liquor products(Assam, Goa), crude oil (Assam), carbonated softdrinks (Maharashtra), sweetmeats and savories (NCTDelhi), mobile phones (Gujarat), consumer durables(Odisha) and aviation turbine fuel (Rajasthan);(ii) introducing new taxes such as environment and

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health cess (Rajasthan); (iii) rationalising taxes suchas revision of the Passenger Goods Taxation Act(Jammu and Kashmir), revision in the entry tax rateto make it consistent with the VAT rate (Assam andOdisha), rationalisation/revision of motor vehicle tax(Assam, Kerala, Manipur, Maharashtra and Mizoram),amendments in the VAT Act and e-services for luxuryand profession tax (Meghalaya), amendments/revisions in the Entertainment Tax Act (Uttarakhand),rationalisation of the stamp duty structure through theintroduction of e-stamping (Uttarakhand, HimachalPradesh, Jharkhand and Puducherry), upwardrevision in stamp duty rates (Goa, Maharashtra andTamil Nadu) and levy of stamp duty on monthlypayment of salaries to all regular Government officialsincluding the Council of Ministers and ParliamentarySecretaries and on all bills in respect of payment madeby various Departments and offices to private parties(Mizoram); (iv) widening the tax net to include serviceslike construction of commercial complexes andcolonies, TV/radio programme production, architects/interior decorators, chartered accountants andadvertisement hoardings (Jammu and Kashmir); and(v) improving tax compliance through e-governance(Tamil Nadu, NCT Delhi, Arunachal Pradesh, Bihar,Jharkhand and Puducherry) and increasing penaltyfees (Kerala). Besides these changes, North EasternStates have announced an increase in VAT rate from4 per cent to 5 per cent, as decided by the EmpoweredCommittee of State Finance Ministers.

3.4 States also undertook certain tax measures,both on the supply as well as on the demand side, totackle high food inflation. Measures taken on thedemand side include tax exemption for cereals(Jammu and Kashmir, and Maharashtra), pulses andcondiments (Maharashtra), exemption from entry taxfor certain primary food items (Odisha) and taxexemptions for daily household goods (Chhatisgarh).Measures taken on the supply side to promoteagricultural production include exemption of VAT onitems such as green houses, drip and sprinklersystems, pesticides, insecticides and weedicides andtoll exemption for animal and poultry feed, miltchanimals and beehives (Jammu and Kashmir).

3.5 The sharp increase in global crude oil pricesduring 2011-12 and its impact on the under-recoveriesof oil marketing companies necessitated an upwardrevision in the domestic retail price of administeredpetroleum products by the Central government in June2011. Commensurately, the Central governmenteliminated customs duty on crude oil and reducedexcise duty on diesel. Several State governments alsoannounced VAT exemptions/reductions on petroleumproducts to contain the rise in their prices (Table III.1).

3.6 On the non-tax front, revenue enhancingmeasures announced by the States include (i)rationalisation of the license fee for retail sale of liquor(Goa and Assam), (ii) rationalisation of forest royalties(Manipur), and (iii) introduction of daily lotteries(Kerala, A

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