State finances: More disclosure please

Public disclosure of information on projected fiscal activity and major fiscal risks is one of the pillars of fiscal transparency.

In India, both the levels of government — Centre and State — are equally important and the position also gets complicated because of inter-governmental transactions. In 2010-11, in terms of total receipts and expenditure, States' share worked out to more than 50 per cent; borrowings about one-fifth; and gross fiscal deficit about one-third (Table 1) .

The current and expected budgetary operations of governments have significant influence upon money and other segments of financial markets and price discovery. But for timely and objective disclosure of information, market activity can be subject to considerable distortions and volatility.

Huge outflows on account of tax collections and borrowings and inflows on account of expenditure and alternating cash surplus and deficit situations disturb liquidity and interest rates enormously, as is evident from experience.

Overall, the information flow from the Centre has improved over the years, but in respect of States,the situation is deplorable, to say the least.

For our limited purpose here, let us consider only two dimensions — market borrowings and cash position.

Market Borrowings

The Centre was for long in a denial mode about the expected level of market borrowings and, at the fag end of the current year, it has announced twice so far to go in for additional borrowings, amounting to a whopping Rs 93,000 crore, an excess by 27 per cent over the budgeted net market borrowing. But, there are other indications coming from monthly release of information on fiscal position, covering expenditure and receipts under major heads, borrowings as also the deficit position, which allowed the market to form its own informed expectations.

In the case of States, no public information is available about periodic fiscal position even at the aggregate level, leave alone state-wise. For instance, how far have the States completed their borrowing programme for 2011-12? The market does not know, because, in the first instance, no information is available on borrowings States had budgeted for 2011-12. Secondly, unlike the Centre, there is no calendar of borrowing programme for States. Since States require the Centre's approval for borrowing, at least such approved amounts should be disclosed by the government or the RBI.

As per RBI data, the budgeted borrowing of States amounted to Rs 1.04 lakh crore for the earlier year 2010-11. The actual gross borrowing based on the auction results of States amounted to only Rs 0.99 lakh crore, apparently showing a better performance of States. For the current year, the actual borrowings up to January 13, 2012 amounted to Rs 1.05 lakh crore, which anticipates that the gross borrowing of States for 2011-12 also may not be excessive.

It should be noted that States were allowed fiscal relaxations in 2008-09 and 2009-10 during financial turmoil, and additional borrowings up to 0.5 per cent of gross domestic products of respective States, when the Centres gross fiscal deficit jumped to more than 6 per cent. In this environment, it is not clear whether States will also come with substantial additional borrowings before the end of this financial year. As the Centre itself has a remaining borrowing programme of about Rs 86,000 crore, any significant entry of States in the primary market would add to pressure on ten-year yields.

Cash Balances

Ascertaining the cash balance position of governments is much more complex. In the case of the Centre, when in deficit, it is reflected in movements of ways and means advances from the RBI. When they are in surplus, the cash balance position may not reveal the full picture since part of such surplus is invested in their own securities. In the case of States, the combined deficit would show up in ways and means advances. But, since surplus funds are invested mostly in treasury bills, such investments would show the surplus cash position. It should be noted that such investments provide a significant cushion in financing the fiscal deficit of the Centre.

While the Centre held cash surpluses in the later half of the last financial year, during most of the current fiscal, it was in deficit and, as on January 6, 2012, its ways and means advances stood at Rs 49,420 crore; the combined position of States shows an enormous surplus — the total amount remaining invested in treasury bills stood at around Rs 1.0 lakh crore. But for this cushion, the Centre's cash position would look considerably worse than what apparently is seen from the data (Table 2) .

More Disclosure

A transparent and periodic information flow about fiscal position of State governments, preferably State-wise, would considerably add to market stability and better assessment of fiscal performance of Centre vis-a-vis states and also inter-se states, There must be a coordinated effort from the RBI, Centre and the State governments towards this end.

(The author is Director, EPW Research Foundation. The views are personal.)

COMMENT NOW