Fiscal Analysis Division STATE FINANCES : A STUDY OF BUDGETS OF 2015-16 Fiscal Analysis Division DEPR RESERVE BANK OF INDIA May 27, 2016

Importance of the Report Unique report which is the primary source of information on disaggregated state-wise fiscal data. Provides analysis and assessment of finances of state governments. Inputs of this report is key to the compilation of combined government finances, the bi-annual publication of which is an IMF SDDS requirement. The theme of this year’s report is ‘Quality of Sub- national Public Expenditure’ – critical to growth while achieving fiscal consolidation.

Major Deficit Indicators of State Governments (Amount in Rs billion) Item 2011-12 2012-13 2013-14 2014-15 2015-16   (BE) (RE) 1 2 3 4 5 6 7 Revenue Deficit -239.6 -203.2 105.6 -543.0 183.4 -537.2 (-0.3) (-0.2) (0.1) (-0.4) Gross Fiscal Deficit 1,683.5 1,954.7 2,478.5 2,950.6 3,654.6 3,333.3 (1.9) (2.0) (2.2) (2.3) (2.9) (2.4) Primary Deficit 315.4 450.0 789.5 1,018.6 1,726.0 1,141.8 (0.4) (0.5) (0.7) (0.8) (1.4)

Accounts 2013-14 The fiscal position of states deteriorated during 2013-14, leading to re-emergence of a revenue deficit (RD) after a gap of three years. The reduction in consolidated revenue expenditure was more than offset by a reduction in revenue receipts, reflecting the slowdown in overall economic activity.

Accounts 2013-14 (Contd.) The consolidated revenue receipts-GDP ratio of states declined due to reduction in both own revenue and central transfers. In particular, revenue from stamps and registration fees, sales tax/value added tax (VAT) and state excise as well as shares in central taxes decelerated in 2013-14 from a year ago.

Latest update (based on 25 states) Estimates prepared on the basis of consolidated data available in respect of 25 state governments (for which budgets have been presented and data received) shows that all key deficit indicators of states have deteriorated in 2015-16 (RE) from 2015-16 (BE) as well as 2014-15. GFD/GDP ratio of states crossed the threshold of 3 per cent in 2015-16 (RE). Last time it occurred was in 2004-05 (3.3 per cent of GDP). States, however, intend to revert back to fiscal consolidation in 2016-17 as they have budgeted for a revenue surplus while pruning GFD/GDP ratio to 2.8 per cent.

Revenue Receipts Despite an increase in the share of tax devolution from 32 per cent to 42 per cent of the divisible pool on the recommendations of the FC-XIV, the Central transfers-GDP ratio is budgeted to decline due to the sharp reduction in grants-in- aid. Could be an outcome of discontinuation of many CSS schemes in the Union Budget 2015-16, resulting in a decline of funds under the state plan scheme. These changes have led to a decline in central transfers to states by 0.3 per cent of GDP.

Central Transfers to states

Outstanding Liabilities The outstanding liabilities of state governments have experienced double digit growth since 2012- 13. However the consolidated debt – GDP ratio remains below the target recommended by FC- XIII for states. Despite the budgeted reduction in GFD/GDP ratio in 2015-16, outstanding liabilities would increase on account of the phased takeover of bonds issued by power discoms under the Financial restructuring Plan (FRP).

As the participating states in the FRP would have to progressively take over the entire bond liabilities of the discoms by extending guarantees by 2017-18, their liabilities would increase in the coming years. In this regard, the new initiative of the Government to financially turnaround discoms – Ujjwal Discom Assurance Yojana (UDAY) – may likely alleviate the non-performing asset (NPA) problem of banks, but would increase the liabilities of participating states.

Trend in Expenditure

Trend in Committed Expenditure

Expenditure on Social and Physical Infrastructure in 2013-14

Quality of Expenditure - Select Indicators (Percentage of total expenditure) States Social Sector Physical Infrastructure Comitted Expenditure 1 Education Health Roads & Bridges Energy Int. Paym. Pension Admin. Exp Group A   Mean 17.4 4.3 5.0 8.7 11.8 5.7 Coeff. of Variation 12.6 19.4 12.0 57.6 11.1 13.5 23.3 Group B 16.4 4.2 3.7 13.7 6.6 10.2 9.9 48.5 73.2 36.4 20.3 39.6 Group C 16.8 3.6 6.3 6.5 7.4 9.8 7.0 9.4 10.9 21.2 56.5 29.3 21.4 28.9 All States 16.9 4.0 5.1 6.7 10.5 10.1 16.6 33.3 64.8 39.4 24.0 32.6

Empirical Results: Expenditure composition and growth

Empirical Results: Expenditure efficiency - education

Empirical Results: Scores on expenditure quality

Impact of FRBM A well-designed fiscal responsibility legislation (FRL) helps in containing fiscal deficits and rationalizing expenditure biases, while addressing the problem of time inconsistency and enhancing transparency and accountability (Corbacho and Schwartz, 2007).

Table: Total Expenditure (per cent)   Total Expenditure/GSDP Pre-FRBM Post-FRBM Group A Goa 22.9 17.0 Maharashtra 14.0 12.2 Haryana 15.5 13.4 Gujarat 16.8 13.1 Tamil Nadu 14.7 15.2 Group B Kerala 15.6 15.4 Punjab 16.7 15.9 Karnataka 16.1 17.7 Andhra Pradesh 17.1 West Bengal 14.4 Group C Rajasthan 18.0 Jharkhand 20.3 19.4 Chhattisgarh 19.2 Madhya Pradesh 21.1 Odisha 19.9 17.6 Uttar Pradesh 17.4 21.2 Bihar 26.2 24.1 Average 17.8

Table: Revenue and Capital Outlay (per cent) State Rev.Exp./GSDP Capital Outlay/GSDP Category Pre-FRBM Post-FRBM Group A   Goa 20.0 13.9 2.8 3.1 Maharashtra 12.0 10.3 1.5 1.7 Haryana 13.2 11.3 1.9 Gujarat 14.3 10.5 2.5 Tamil Nadu 12.7 0.9 2.0 Group B Kerala 14.0 14.1 1.0 Punjab 14.9 14.7 1.2 1.1 Karnataka 13.7 Andhra Pradesh 14.2 West Bengal 13.5 0.8 Group C Rajasthan 15.3 2.3 2.4 Jharkhand 15.6 15.9 3.5 3.2 Chhattisgarh 13.3 15.5 3.0 Madhya Pradesh 17.3 16.2 2.2 3.3 Odisha 17.2 15.2 1.8 Uttar Pradesh 15.1 1.3 3.7 Bihar 22.4 19.3 4.3 Average

Table: Developmental and Non-developmental Expenditure (per cent) State Dev.Exp./GSDP Non-dev.Exp./GSDP Category Pre-FRBM Post-FRBM Group A   Goa 14.2 12.2 8.7 4.8 Maharashtra 8.3 5.1 3.8 Haryana 9.7 5.8 3.6 Gujarat 11.8 9.1 4.9 3.9 Tamil Nadu 9.6 4.6 4.7 Group B Kerala 9.5 8.0 5.9 6.5 Punjab 8.5 7.6 8.1 Karnataka 11.4 12.4 4.4 Andhra Pradesh 11.5 12.1 5.5 West Bengal 8.9 6.4 Group C Rajasthan 11.3 6.7 5.3 Jharkhand 14.6 13.4 5.7 6.1 Chhattisgarh 10.6 4.5 4.2 Madhya Pradesh 13.5 14.8 6.2 5.4 Odisha 11.7 7.9 5.6 Uttar Pradesh 10.0 12.7 7.0 7.7 Bihar 15.4 16.6 10.8 7.5 Average 11.2

Some Issues Fiscal consolidation - revenue augmenting measures, Improving the viability of Discoms Reforming State Level Public Enterprises (SLPEs) Proposed implementation of GST Rationalisation of centrally sponsored schemes (CSS) - prioritize and raise the productivity of expenditure Reinvigoration of State Finance Commissions (SFCs) - greater synchronisation between state governments and local bodies in devolution and utilisation of resources.

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