States slash expenditure, grow tax base
Unless their budget numbers go for a complete toss, the good news coming out of the state government data is the manner in which states are controlling their deficits. Combined fiscal deficits, RBI’s latest report on state finances points out, are set to fall from 2.3% of GDP in FY13 to 2.2% in FY14—for the non-special category states, the fall will be from 2.6% to 2.4%. The real story, though, lies in how this is to be achieved. So, from a growth of 23.3% in FY13, total expenditure growth in FY14 is set to almost halve at 11.9%.
Even more interesting, is the progress made by states in raising revenues, both tax as well as non-tax. Cost-recoveries which used to be under 10% in 2000-04 in the irrigation sector are up to 20% in FY14, though they remain woefully low—despite actually rising—at 5.9% in education. In the case of own tax revenues (OTR), these rose from a mere 5.8% of GDP in the boom years of 2004-08 to a projected 6.7% in FY14. And since the states’ OTR have grown faster than central tax (CT) transfers they get from the centre, the gap between the two has increased. In 2004-08, OTRs were 5.8% of GDP versus 4.7% for CT—by FY14, OTRs were 6.7% of GDP as compared to 5.6% for CTs.
With VAT receipts adding up to around two thirds of states’ OTR—and petroleum receipts around 30% of this—states claim justification for not implementing GST. This is, however, the wrong way to look at GST. While the states’ OTR are projected to grow 15.5% in FY14, VAT revenues—a subset of this—are projected to grow at a faster 17.2%. GST, like VAT, involves getting more people into the tax net and, therefore, tends to grow faster. As for states like Madhya Pradesh which have opposed GST—this involves subsuming petroleum which accounts for 42% of the state’s VAT collections into the GST—the centre had proposed a way out. Bring petroleum under GST, at say a 12% rate—this will ensure that all users come under the net—but allow the state to levy a ‘carbon’ surcharge to make good the shortfall in tax collections. Hopefully, this will be sorted out when the next government comes in—if states are looking for the next big boost to revenues, only GST can provide that.