The power sector liability that the state governments have assumed could play out well, but only if the Centre does not decide to saddle the states with the next Pay Commission.
The size of the power liability of R1,93,000 crore for the states brings above the line the contingent liabilities that in any case already existed for them. These contingent liabilities have been frightfully difficult to estimate for RBI or for the successive Finance Commissions, so bringing them above the line creates transparency. This makes lenders more comfortable. But a comparison by size shows that the power bill is similar to the last Pay Commission award.
This means that if the Seventh Pay Commission arrives before the General Elections of 2014, the states will be clearing two similar awards from their budgets. To get a sense of where this can land the states, one needs to do a check on their current finances. This will give an indication of the nature of adjustments that state governments have got to undertake to bring their budget into order once the above awards enter their books.
On a consolidated basis, the state government budgets show a revenue surplus of 0.1% of the GDP for 2011-12. This reflects an improvement since the Sixth Pay Commission sunk them in 2009-10. But the surplus is lower than the target for the year as states’ revenue expenditure has exceeded their revenue receipts for the first time since then. Obviously, this has impacted their fiscal deficit, which is higher than the progressive target set by the Thirteenth Finance Commission.
While this is something that the states can be expected to cure if the economy moves faster this year, since their tax earnings will rise, they have fought to keep their budgets in control by cutting aggregate capital expenditure. An RBI analysis shows that even without the power sector hit, in the current fiscal, states’ development and social sector expenditures were expected to decline as a percentage of GDP. The cutback in capital outlay is more severe if it is compared against states’ estimated increased outlay. An Icra study of the six large