Fiscal deficit of the states at 2.3% of GSDP in FY12 is well within the limits prescribed by the 13th Finance Commission

In an environment where there is gloom all around, the fiscal health of the states provides some room for comfort. This is particularly important as the Union Budget has shown a significant slippage in not just adhering to the Finance Commission targets, but even to those committed by itself in the medium-term fiscal plan (MTFP). There has been a gloom on the fiscal front ever since the Union Budget was presented and we have seen much evidence of the commitment to contain subsidies, excepting the recent episode of increasing the price of petrol.

Unfortunately, there is a considerable time lag before the data on state finances are assembled to get a consolidated picture. In fact, RBI comes out with detailed analysis of state finances every year, but after a considerable time lag. At the same time, it is necessary to get a consolidated picture of Union and state governments on real time basis in order to assess the fiscal stance and estimate the volume of government borrowing that will be undertaken during the year. Much of the discussion on the fiscal situation is focused around Union finances, which gives only a partial picture. This note provides the analysis of state finances based on the estimates compiled from states? 2012-13 budgets. The information is available for all states except Punjab, Manipur, Mizoram, Sikkim and Uttarakhand.

The good news is that the states? fiscal situation is not a cause for alarm. In the aggregate, the states had a marginal revenue surplus in 2010-11 and 2011-12. For 2012-13, the estimated surplus is about 0.5% of GDP. In fact, the surplus would have been more but for the large revenue deficits in Kerala, Punjab and West Bengal, the three states for which separate targets for consolidation were set by the Finance Commission. In addition to these, Haryana also had revenue deficits of over 1% of GSDP in 2010-11 and is estimated to have about 0.7% in 2012-13. Similarly, the aggregate fiscal deficit of the states is estimated at 2.3% of GSDP in 2011-12 and is estimated at just over 2% of GSDP in 2012-13, well within the limits prescribed by the 13th Finance Commission. Even when the estimates for the four states for which the information is not available are included, it is unlikely to be more than 2.5%.

Despite this reasonably good picture of state finances, the overall situation is worrisome. The recent estimates show that the ratio of fiscal deficit to GDP for the Union government in 2011-12 was 5.7% and with the states? deficit of 2.3%, the consolidated deficit works out to 8%. This demonstrates the setback to the consolidation plan as the consolidated deficit estimate for 2011-12 is higher than the previous year by one percentage point. If the Union government is able to contain the deficit at the budgeted level of 5.1% in 2012-13, the consolidated deficit will be about 7.4%. This implies that we will still be in the zone of discomfort and this calls for specific strategy and action plan by the Union government.

Although the states? overall fiscal performance is not alarming, performance of some of the states is a cause for worry. In terms of the revenue deficit, besides the three states identified by the Finance Commission (Kerala, Punjab and West Bengal), Gujarat, Haryana and Tamil Nadu ended up with substantial deficits in 2010-11. In 2011-12, Gujarat improved to emerge as a revenue-surplus state, but Goa and Maharashtra emerged as revenue-deficit states in addition to Haryana. West Bengal was the worst performer, with the highest revenue, fiscal and primary deficits in all the three years. Although the Budget estimate of 2012-13 proposes to bring the revenue deficit relative to GSDP down from 3.1% in 2011-12 to 1.1% in 2012-13, and compress the fiscal deficit from 3.9% to 2.5%, it is not clear how this will be accomplished. Interestingly, among the non-special category states, every single state has budgeted to reduce the fiscal deficit to less than 3% of GDP in 2012-13, meaning they will be well within the limit of 2.4% of GDP prescribed by the Finance Commission for 2014-15 this year itself.

From the developmental perspective, the volume of capital expenditures incurred by the states is an important indicator. In most of the states, capital expenditures relative to GSDP have increased in 2011-12 and the Budget estimates for 2012-13 show a similar trend. The aggregate capital expenditure for 2012-13 is budgeted at 2.2%, which is marginally higher than 1.9% in 2010-11 and 2.1% in 2011-12. Interestingly, some of the low per capita income states have high capital expenditure ratios. The highest capital expenditure to GSDP ratio is in Bihar, the state with the lowest per capita GSDP. Other low per capita income states with high capital expenditure ratios include Chhattisgarh, Madhya Pradesh and Uttar Pradesh. This trend raises hopes of convergence of incomes in the states over time.

How have the states fared in terms of raising resources? The analysis of resource position in the states shows that as a ratio of GSDP, there has been a small increase due to both own revenues and transfers from the Union government. The aggregate states? own tax revenues relative to GSDP increased marginally from 7.1% in 2010-11 to 7.5% in 2011-12 (RE). A similar trend is seen in the case of individual states. The lowest tax-GSDP ratio is in West Bengal (4.5%), where it is almost 2.9 percentage points lower than the average. This is true of own tax and non-tax revenues as well. The highest tax ratio was in Karnataka (10.1%) followed by Tamil Nadu (9.2%).

In an otherwise grim scenario, the fiscal situation in the states provides some comfort. This also underlines the important fact that the Union government will have to redouble its efforts to bring about overall fiscal consolidation in the country. Of course, states like West Bengal will be better off if they work out a strategy and implementation plan to improve their finances before demanding that the national taxpayers should bear the burden of their past fiscal mismanagement.

The author is director, NIPFP. These are his personal views