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Ministry of Finance23-August, 2006 18:32 IST
State finances improving with fiscal consolidation and fiscal reforms: Finance Minister

State Finances are significantly improving with adoption of fiscal Consolidation and Fiscal reforms and the States are now more committed to fiscal prudence & raising revenues, stated the Finance Minister here today. Shri P. Chidambaram was addressing the meeting of Parliamentary Consultative Committee attached to his ministry, held to deliberate upon State Finances. The Finance Minister emphasized that every generation must learn to live with its own means and not to pass its financial burdens to next generations.

Welcoming the members, Shri Chidambaram said that state finances started deteriorating significantly over the years as large revenue deficits (RD) led to large fiscal deficits (FD) and spiraling debt burdens, resulting in emergence of vicious cycle of deficit, debt and concomitant high debt service payments for most of States. The deterioration is mainly attributed to deteriorating balance on Current Revenue (BCR), Poor return on investment, Unrealistic plan projection financed mainly by borrowing and declining capital outlays.

Several steps were attempted from time to time to improve the state finances and fiscal consolidation has been an important agenda for the States during the last six to seven years. Many States adopted medium term fiscal reform programmes aimed at reducing deficit to a sustainable level and more particularly to improve productivity of expenditure, the Finance Minister said. All States have realised that fiscal prudence is the need of the hour and except one, all States have decided to follow FRBM, added the Minister.

To reduce the interest burden of the States, Government of India formulated a Debt Swap Scheme that was in operation from 2002-03 to 2004-05. The scheme covered outstanding high cost loans with interest rate of 13% and above. An amount of Rs. 1,02,033.59 crore of central loan was swapped upto March, 2005.

The Finance Minister informed the members that though the growth of outstanding debt has been arrested to some extent, it is still projected as high as 32% of GDP in 2005-06 (Revised Estimates)(RE). The interest burden of the States is projected to come down to 18.86% in 2005-06 (RE).

The fiscal corrections in the revenue account have come about primarily through containment of non interest revenue expenditure. There has also been a low utilization of Ways and Means Advances and Overdrafts during the year. For the first time, the States started holding surplus cash balances beginning from first quarter of FY 2006. As on 2.8.2006, States were holding Rs. 53,756 crore as surplus invested in the treasury bills. This could be attributed to several factors including (i) containing expenditures by States particularly non-interest revenue expenditure and stagnant capital outlay (ii) large central transfers in the light of TFC recommendations and higher economic growth (iii) buoyant receipts and various small savings (iv) completion of Debt Swap Scheme, (v) better liquidity management by States (vi) somewhat slow expenditure on Centrally Sponsored Schemes particularly where States’ contribution is stipulated (vii) buoyant revenue collections.

Shri Chidambaram informed the members that the Ministry of Finance has now drawn up net borrowing requirement of individual States consistent with the fiscal deficit reduction target as suggested by Twelfth Finance Commission (TFC). The States have, by and large, conformed to the borrowing limits set and exceptions have been rare. The minister said that to avail the funding for externally aided projects, the States should come out with realistic development projects convincible to donors and improve their administrative and executive capacity. The Centre would extend all help in this regard.

Introduction of State Value Added Tax (VAT) is the most significant tax reform measure at State level. The State VAT has replaced the earlier State Sales Tax System. As on date, 30 States/UTS have implemented VAT. Tamil Nadu has announced its decision to implement VAT w.e.f. January 1, 2007. Uttar Pradesh and Pondicherry are yet to announce their decision to implement VAT. Andaman & Nicobar Islands and Lakshdweep do not have sales tax/VAT. Andaman & Nicobar Islands and Lakshdweep do not have sales tax/VAT. In 2005-06 a total amount of Rs. 2,471.24 crore was released as VAT compensation. During the current year an amount of Rs. 1,695.31 crore has been released so far.

Pension liability of States is mounting that can only be contained by long term structural reforms. To date, 17 States have switched over to defined contributory pension scheme for the new recruits as in the case of Government of India.

The major deficit indicators as ratios to Gross State Domestic Products (GSDP) showed improvement at the end of 2004-05 and the trend has continued in 2005-06. The effect of the increase in salaries and pension as a result of adoption of Vth Pay Commission has been stabilized over the years with the adoption of Medium Term Fiscal Reforms Programmes (MTFRP) by the States as evidenced from the improvement in the ration of salary plus pension to total revenue receipts from 59.43% in 1999-00 to 43.98% in 2004-05.

High economic growth of 6%-8% and a pick up in the industrial growth rates have also helped to boost revenues. Liquidity position has also improved, and barring one or two, States are not generally resorting to RBI for overdrafts.

The revised estimates for 2005-06 reflect strong commitment by States to reduce existing fiscal imbalances as evidenced by discernible corrections in the level of Gross Fiscal Deficit (GFD). The primary revenue balances also showed improvement with a surplus position during 2005-06. The balance from current revenues of all states have shown a marked improvement from Rs. 33,357 crore (negative) in 2002-03 to Rs. 10,512 crore (negative) in 2005-06. Similarly, the revenue deficit of all States has improved from Rs. 39,440 crore in 2004-05 to Rs. 19,825 crore in 2005-06 (RE), a reduction of Rs. 19,615 crore, Shri Chidambaram added.

However, the fiscal correction in 2005-06 has not been uniform across the States. Many States showed improvement in RD and FD however, only a few States accounted for a major part of overall correction. Five states have already contained the FD to below 3% of GSDP and 9 States has RD less than 1 percent to GSDP.

States may not be able to sustain the marked correction in key fiscal indicators in 2005-06, unless the issues of revenue augmentation, rationalization of expenditure reforms and containment of debt within the sustainable limit over the medium term are addressed. The correction has to be gradual and steady. Any fiscal correction path under the fiscal responsibility legislation has to be realistic. The process of correction should not adversely impact capital expenditure and spending on social services. The strategy for revenue maximization needs to provide for necessary flexibility to shift the pattern of expenditure and redirect it to productive assets, added Shri Chidambaram.

The meeting was attended by the Minster of State for Finance Shri S. Palanimanickam and senior officers in the Ministry of Finance. Members of Committee who attended the meeting include, S/Shri M.Sreenivasulu Reddy, Lakshman Singh, Angadi Suresh Chanabasappa, M. Ramadass, Tukaram G. Gadakh, Mohan Rawale, Gireesh Kumar Sanghi, A. Vijayaraghavan, Lalit Suri, Amar Singh, Abani Roy and Bimal Jalan.

(Release ID :20178)

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