State of the deficit PDF Print E-mail
Tuesday, 03 April 2012 00:22
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Some improvement, some fudges on power mainly
With the fiscal deficit of states projected to fall to 2.2% in FY12, from 2.7% in FY11 and 2.9% in FY10, that’s a welcome change, more so since the central fiscal deficit is showing no such improvement. What makes this especially heartening is that there has been a healthy rise in tax base—the states’ own tax revenue are budgeted to rise 17.7% in the year (of which VAT revenues are to rise 18.5%) as compared to the central share of taxes rising a lower 16.6%.
To be sure, there is the issue of compressing both development and social sector expenditure (development expenditure is to increase just 10% in FY12) which RBI says raises concerns about the quality of fiscal adjustment being undertaken. This is a criticism made of the central government in the past, but if government expenditure is inefficient, such compression may not be a bad thing, more so if well-administered PPP substitutes are put in place.
What is not clear is why RBI doesn’t wait a month or two more before coming out with its State Finances report since it will then have the actual data for various states—West Bengal’s FY12 fiscal deficit in the RBI report is 2.9% of GSDP while budget data just out puts it at 3.9%. The larger point, as RBI itself notes, is that of the losses of the state electricity boards which could add substantially to the deficit, thereby wiping out all the consolidation over the past few years. While power sector losses have been galloping in recent years, states have budgeted for a hike in subsidy payments of a mere 2.8% in FY12, from R36,980 crore in 2010-11 to R38,020 crore in 2011-12. Apart from the issue of how these numbers are a gross underestimate, states don’t even pay the electricity boards this money. In 2007-08, of the R19,386 crore of subsidies booked, only R16,517 crore or 85% was actually paid. By 2009-10, the Power Finance Corporation reports, just 56% of the R34,000 crore booked was released by the states, an exercise that makes the states’ finances look better. Bring in the unpaid subsidies of previous years and it is obvious the real fiscal picture will be much worse.
Indeed, once states have to bring on their books the accumulated losses of SEBs, as VK Shunglu has recommended, the picture will look very poor. While Finance Commission grants have played a role in the state finances looking better, RBI helps them along. West Bengal’s debt, for instance, also gets the same SLR status like that of fiscally better states like Maharashtra or Gujarat. This needs to change.

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