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States on fiscal reform track. The annual report of the RBI on state finances indicates
that the states have stuck to the promise of fiscal consolidation—revenue account is
turning positive and debt-GDP ratios are falling. States are now less dependent on the
higher-cost National Small Savings Fund. Fiscal consolidation has come in by
expenditure control. The concern is that development expenditure and social-sector
expenditure is tapering off. Increasing power tariffs that can help tide over SEB losses
and increased transparency in accounting are critical next steps.
Fiscal consolidation the order of the day
The State Government budgets for FY2012 proposed to carry forward the fiscal correction process
by focusing more on expenditure control against the backdrop of rollback of fiscal stimulus
measures and tapering-off of the impact of the Sixth Pay Commission award. All states, barring
Goa, amended their Fiscal Responsibility and Budget Management (FRBM) Acts/Rules, in line with
the Thirteenth Finance Commission (ThFC) recommendation, with the aim of eliminating revenue
deficits and bringing about gradual reductions in fiscal deficit and debt levels latest by 2014-15.
According to the budget estimates, out of the 28 states, only five are expected to exceed the ThFC
recommendations of GFD/GSDP ratio.
Revenue account balance budgeted to turn positive; though source remains worrying
The consolidated revenue account is budgeted to switch from deficit to surplus during FY2012
after a gap of two years, driven primarily by a compression in revenue expenditure. However,
state-wise position with regard to quality of expenditure shows that during FY2012, out of the 28
states, 15 states have budgeted for a decline in development expenditure-GSDP ratio and 16
states have budgeted for a decline in social-sector expenditure-GSDP ratio over the previous year.
Most of the expenditure compression comes from the special category states.
Outstanding debt ratios falling; shift towards market loans
The consolidated debt-GDP ratio of the states declined during FY2011 to 23.5% from 25.5% in
FY2010, with a reduction in debt-GSDP ratio across all the states (except two). With further
budgeted reduction during FY2012, debt-GDP ratio at 22.5% is expected to be much below the
ThFC recommended limit of 26.1%. This trend is poised to continue in the medium term with the
amended FRBMs of the states setting out a graduated path of reduction in debt-GSDP ratios for
the respective states. We note that compositional shift of outstanding liabilities towards market
loans continued during FY2011 and are budgeted to increase further during FY2012.
Two tricks required: tariff and transparency
The financial losses of state power utilities continue to be a drag on state finances which
necessitate not only renegotiating debt liabilities of distribution utilities but also undertaking
necessary reforms to enable independent functioning of State Electricity Regulatory Commissions
and to address issues relating to periodic tariff revisions. As part of fiscal transparency initiatives,
the State Governments need to ensure that their finances capture both explicit and implicit
liabilities associated with certain off-budget activities, including project financing undertaken
through SPVs/public-private partnership mode.
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