States' expenditure pattern is worrying, says RBI

G Srinivasan New Delhi | Updated on April 12, 2011

Both revenue deficit and gross fiscal deficit of States are hopefully to fall in 2010-11, the RBI said after a study of their budgets of 2010-11.

The emerging expenditure pattern, particularly development and capital expenditure of the State Governments across the country, appears to be none too encouraging as their fiscal correction course through adjustments in the twin areas raises apprehensions about the quality of fiscal adjustment programmes.

This is the nub of the latest report of the apex bank, the Reserve Bank of India, titled ‘State Finances—A Study of Budgets of 2010-11'.

While as many as 21 States had budgeted lower development expenditure to gross state domestic product (GSDP) ratios gratuitously, a similar decline in the capital outlay to GSDP ratio in 20 States might have implications for growth in these States.

RBI study

That the RBI study released on March 31, 2011 did not make much impact on the poll-bound States which had promised a whole lot of goodies and freebies if elected to power only proves that whether faced with election or not, the State governments do not believe in ensuring non-inflationary growth as a leveller for bringing the gains of development to legions living on the margins of existence.

Though the developments in State finances during 2008-09 to 2009-10 did carry the adverse impact of a moderate slowdown in the Indian economy, this was worsened when revenue deficit re-emerged at a consolidated level after a hiatus of three years with the gross fiscal deficit shooting up above 3 per cent of GDP in 2009-10.

However, both revenue deficit and gross fiscal deficit of States are hopefully to fall in 2010-11, the RBI said after a study of their budgets of 2010-11.

Many State-level public enterprises (SLPEs) were set up to provide necessary support to growth and development processes in the States.

Over the years (Available data for 25 States and one Union Territory for 2008-09 reckons the turnover of 1,212 SLPEs – working and non-working — at Rs 3.65 lakh crore, employing 18.7 lakh persons.), their aggregate investment was estimated at Rs 4,39,511 crore. But SLPEs of only nine States earned profits during 2008-09, with only six States showing accumulated profits as at end-March 2009.

Dividend policy

On the other hand, cumulatively, SLPEs have piled up losses to the extent of Rs 68,771 crore as at end-March 2009. Even with budgetary backup in the form of equity, loans and subsidies, there are no signs of improvement in their performance, as the average return on capital employed remains measly in most States. Even as the return to State governments on SLPEs has been paltry, States do not have a dividend policy for the SLPEs save in a few States viz., Punjab, Haryana, Himachal Pradesh, Uttar Pradesh, Kerala and Madhya Pradesh. In the States where dividend policy exists, SLPEs do not strictly implement it with the result that the return is “abysmally low and nowhere near the desired level of 5 per cent return on equity suggested by the 12th Finance Commission”.

States with high level of subsidies to SLPEs include Andhra Pradesh, Tamil Nadu, Gujarat, Karnataka, Maharashtra, Haryana and Punjab. In this context, the 13th Finance Commission recommended that that all working SLPEs, except those in the welfare and utility sectors, become financially viable. Loss-making public-sector units which function in non-core areas could be deemed for closure, and all States in consultation with the Accountant General should draw up a road map by March 2011 to close these SLPEs' accounts. It is the second week of April, and it is anybody's guess how many States would have come out with a list to wind up losing concerns, preoccupied as some are with electoral battles while others are mired in non-core political issues.

Finance commissions

While assessing Finance Commissions in a separate chapter, the central bank rued that the recommendations made by them are only “advisory and hence not binding on the Government”. Hence, it is too much to expect the States to tone up SLPEs, let alone devise policies that align cost to services rendered over the long haul, fiscal experts say wryly. The lack of operational efficiency and commercial viability of SLPEs has been “a major drag on State finances”, according to the RBI study.

But the key to bring visible improvement in State finances is to unlock the values enshrined in the SLPEs by resuscitating them before it is too late.


Published on April 12, 2011

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