The Hindu Business Line : ‘Strengthening revenue flows key to durable fiscal consolidation’

Study pointers
Improvement in cost recovery of public services will boost State finances.
Lack of data on wages, operations and maintenance in State Budgets.
Uneven increase in outstanding debt reflected in large surplus cash balances.

G. Srinivasan

New Delhi, Jan. 9 In commending the State governments’ recent success in fiscal correction course, the Reserve Bank of India (RBI) has aptly told them to render the fiscal consolidation durable through “strengthening revenue flows into the Budget while placing emphasis on targeting expenditures to meet the development objectives”.

In its just published comprehensive study on State Finances: A Study of Budgets of 2007-8, the apex bank pertinently points out that prudent fiscal management dictates that durable fiscal consolidation should be made through fiscal empowerment, i.e., by expanding the scope and size of revenue flows.

Even as a fiscal strategy based on revenue maximisation would give the requisite flexibility to shift the pattern of expenditure towards developmental purposes, the central bank rightly cautions the State that any fiscal adjustment purely based on expenditure reduction might result in welfare losses and risks the danger of triggering a downturn in overall economic activity.

Tax incomes

While the advent of value added tax (VAT) was an unqualified success and States’ own tax revenue has also witnessed buoyancy in recent years, States’ own non-tax revenue as ratio to gross domestic product has declined from 1.8 per cent in the first half of 1990 to 1.3 per cent in recent years.

Hence, augmenting resource mobilisation from non-tax revenues through appropriate user charges, cost recovery from social and economic services, and restructuring of State PSUs assumes importance. This part is easier said than done as even the Central government is unable to take a cost plus approach to public services — be it urban transport, power, water or even the prices of petroleum products, though the administered pricing mechanism (APM) was dismantled a couple of years ago!

Nevertheless, the RBI study contends that the health of State finances would benefit vastly from improvements in cost recovery of various public services and rationalisation of subsidies. But it hastens to concede that higher user charges would be predicated on ‘concomitant improvement’ in the delivery of services provided by the States.

It is small wonder that recently the Tamil Nadu State Government set off a fleet of 1,000 modern buses at a public function with the State Chief Minister, Mr. Karunandhi.

Transparency

Alluding to fiscal transparency, the RBI deplored the silence of States on the lack of availability of data on the outstanding liabilities and contingent liabilities, the two important fiscal variables. A related problem is the lack of data on wages and salaries and operations and maintenance in the State Budgets.

The study also notes that due to buoyancy in small savings collection over the last few years and the formula- based share in these collections, the autonomous component of State governments’ borrowings from NSSF (National Small Saving Fund) have been more than the required amount for financing their gross fiscal deficit.

Hence this more than proportionate increase in the level of outstanding debt of State governments gets reflected in large surplus cash balances maintained by most of the State governments in the form of investment in 14-Day Intermediate and Auction Treasury Bills, which at the consolidated level stands at around Rs 62,996 crore as of November 23, 2007.

Adverse impacts

RBI has drawn the attention of the States to the adverse impact of this development on their revenue account, since the States’ obtain a lower rate of return on these investments compared to the cost of borrowings for these resources.

As States’ are responsible for most infrastructure services save telecommunications, civil aviation, railways and major ports, RBI said that inadequate investment in infrastructure has constrained the growth and development of the States.

Hence the Bank has laid the accent on States strengthening their finances through fiscal, structural and institutional reforms that would enable them to release adequate budgetary resources as also enable them to mobilise funds more easily for financing infrastructure.

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