Central schemes and state FRBM laws do the trick
While central government finances remain in a mess, the good news is that state government finances are on the mend, and have been for a while. Starting from 2.7% of GSDP in the 2008-10 period, a study by India Ratings expects FY14 fiscal deficits to slip just a bit from the 2.2% projected in the budgets of various states. Indeed, much of the slippage will be on account of the central tax transfers to states likely to fall short by a big margin—from R3.47 lakh crore in the FY14 budget estimates to R3.18 lakh crore in the interim budget. India Ratings, in fact, expects fiscal consolidation to get back on track in FY15.
The correction, it is interesting to note, is quite the way it should be, with greater emphasis on increasing revenue collections than on cutting revenue expenditures—and within expenditure, the good news is that while ‘development’ expenditure has risen as a share of state GDP, ‘non-development’ expenditure has fallen. So, according to RBI data, revenue receipts for states rose from 12.1% of GDP in 2008-10 to a budgeted 13.4% in FY14, or by 1.3 percentage points. Revenue expenditures, by contrast, have risen from 12.2% to 13%, or by a lower 0.8 percentage points. There is, no doubt, a large role played by buoyant central transfers—something that may not be available over the next few years, till the economy comes back on track—and these have risen from 5% of state GDP in 2008-10 to 5.6% in FY14. During the same time, however, the own tax revenues of states have risen from 5.7% of GDP to 6.7%. The only problem is that non-tax revenues have fallen from 1.4% to 1.1%, suggesting that states have a long way in collecting user charges—this is an area states need to tackle, especially given its large potential. The buoyancy of own tax revenues is largely due to VAT buoyancy and suggests the possibility of the GST going through—assuming that the new government assures states that any losses on account of this will be indemnified for the first few years till the system stabilises.
What has helped states, India Ratings points out, is the central debt-swap and other schemes that came into operation once they agreed to legislate fiscal responsibility legislation—from 10.2% in FY04, interest rates fell to 6.8% in FY10; this, however, has started rising again with more market borrowing, suggesting states need to be careful. More so since, in another couple of years, states will once again be hit by the next Pay Commission impact. If states don’t stay the course on electricity reform, the cushion provided by the central programme will also disappear.