Setback to State finances

The four years from 2004-05 were a remarkably good period for the finances of State Governments. The average combined fiscal deficit of States fell to 2.2 per cent of GDP, from their preceding four years' level of 4.2 per cent. An average revenue deficit of 2.5 per cent during 2000-01 to 2003-04 turned into a surplus of 0.1 per cent for the subsequent four years. The outstanding debt-GDP ratio, which had steadily risen from 22.5 per cent in 1990-91 to 32.8 per cent in 2003-04, also declined to 26.6 per cent by 2007-08. All this was, of course, facilitated by high economic growth, which proved to be the proverbial tide that lifted all boats.

The last couple of years have, however, seen a setback to the fiscal turnaround process, with the general growth slowdown impacting the States' own revenues and share in Central taxes. This, alongside the implementation of new Pay Commission scales for employees, has led to the re-emergence of revenue deficits and the overall fiscal deficit climbing beyond 3 per cent. The Reserve Bank of India's recent State Finances: A Study of Budgets shows that the number of States with revenue deficits increased from just four in 2007-08 to six in 2008-09 and 11 in 2009-10. Even for 2010-11, nine States are budgeted to have revenue deficits; the figure may well go up in the revised estimates The picture is worse in States such as West Bengal, where interest payments, salaries and pension payments consume over two-thirds of revenue receipts, as against roughly a third in Tamil Nadu and Maharashtra or less than a fifth in Chhattisgarh. Whichever alliance comes to power in West Bengal — the last State to have enacted a fiscal responsibility law in July 2010 — will have its task cut out.

Reverting to the path of fiscal consolidation is important not only to create headroom for more purposive, growth-promoting investments, but also to complement the reforms already underway at the State-level. Take the Gujarat Government's move to have separate agricultural power feeders that provide guaranteed eight-hour supply to run farm pump-sets and single-phase electricity for the rest of the day. Or, Ms Mayawati's administration in Uttar Pradesh, which has chosen its own concessionaire to build a 165-km, six-lane expressway between Greater Noida and Agra, without involving the National Highways Authority of India. One could also mention Chhattisgarh (which has a well-functioning paddy procurement and public distribution system that was non-existent till recently) and Madhya Pradesh (which has demonstrated the viability of depositing procurement monies directly into farmers' bank accounts). Such initiatives are worthy of emulation even by the Centre, which should set its own standards for the States to undertake further reforms and maintain fiscal discipline.

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