The Reserve Bank of India (RBI) today released the report “State Finances: A Study of Budgets of 2013-14”, an annual publication that provides data, analysis and an assessment of the finances of state governments. It also serves as a primary source for disaggregated state-wise fiscal data.

The report analyses data relating to fiscal position of the state governments. The analysis indicates continuation of the process of fiscal consolidation which was resumed in 2010-11, consequent to the amendments in their FRBM Acts, in line with the targets set by the Thirteenth Finance Commission (FC-XIII). Fiscal consolidation during 2010-13 has largely been revenue-led, with significant increases in both own tax revenue as well as current transfers from the centre, the latter reflecting the enhancements recommended by FC-XIII. Although aggregate expenditure-GDP ratio during the period 2010-13 was higher than in the earlier high growth period of 2004-08, the expenditure pattern reveals an improvement in quality, as reflected in sharp increases in development and social sector expenditures.

Major findings of the study:

State finances budgeted to improve further in 2013-14

• The key deficit indicators of the consolidated state governments relative to GDP are budgeted to improve in 2013-14, with an increase in revenue surplus contributing to a reduction in the gross fiscal deficit (GFD).
• The consolidated revenue surplus-GDP ratio is budgeted to increase to 0.4 per cent in 2013-14 (0.2 per cent in 2012-13), driven entirely by a reduction of 0.2 percentage points in the revenue expenditure-GDP ratio.
• Higher surplus in revenue account would help reduce GFD-GDP ratio to 2.2 per cent of GDP in 2013-14 (BE) [2.3 per cent in 2012-13(RE)] despite a marginal increase in capital outlay-GDP ratio in 2013-14 (BE).

Increase in capital outlay-GDP ratio on the back of increased revenue surplus of states

• The committed expenditure-GDP ratio (comprising interest payments, administrative services and pensions) is budgeted to remain unchanged at 4.0 per cent in 2013-14.
• The capital outlay-GDP ratio, which had increased significantly to 2.3 per cent in 2012-13 (RE) from 1.9 per cent in the preceding two years, is budgeted to increase further to 2.4 per cent in 2013-14. Capital outlay would constitute 15.2 per cent of aggregate expenditure in 2013-14.

Improvement in key fiscal indicators to be broad-based across states

• At the disaggregated level, the key deficit indicators are budgeted to improve in both non-special category (NSC) and special category (SC) states in 2013-14. While 22 states have budgeted for revenue surpluses, 13 states expect to improve their revenue accounts in terms of GSDP in 2013-14. GFD and primary deficit (PD) as ratios to GSDP are budgeted to decline in 16 and 15 states, respectively in 2013-14.

Decline in states’ overall debt-GDP ratio to continue in 2013-14

• The debt-GDP ratio at the state level declined in 2012-13(RE), although the pace of reduction slowed down considerably, reflecting the impact of deceleration in nominal GDP growth and the increase in the GFD-GDP ratio. The declining trend in the consolidated debt-GDP ratio is expected to continue in 2013-14, aided by the budgeted decline in the GFD-GDP ratio.

Issues in State Finances

The report highlights several issues of significance and concern which are likely to have implications for state finances in the immediate to medium-term. Some of the recent policy initiatives of the central government, like the restructuring of centrally sponsored schemes and the implementation of the National Food Security Act 2013 would entail additional responsibility at the state level. Hence, the finances of the states are not only being shaped by their own policies but also by the policies of the central government. Notwithstanding the sustainability in the overall debt position of the states, narrowing of the growth-interest rate differential could exert pressure in the medium-term, particularly for those states that already have a high debt-GSDP ratio. Considering the potential risk to the fiscal and debt sustainability of the state governments that may arise from contingent, off-budget and unfunded liabilities, there is a need for greater fiscal transparency in the disclosure of such liabilities for proper assessment of their fiscal position.

Cyclicality in the Fiscal Expenditures of Major States in India

The theme chapter examines whether fiscal expenditures of major states in India are ‘pro-cyclical’, i.e., it moves with the business cycle or moves counter-cyclical. Unlike many federal economies where sub-national revenues and expenditure move in line with the business cycles, fiscal expenditures of Indian states exhibit different cyclical behaviour across different components. This was revealed by panel data analysis covering non-special category states during the period 1980-81 to 2012-13. While capital outlay is found to be pro-cyclical, primary revenue expenditure turns out to be acyclical. This is because the resource constraints for state governments are more stringent. The underlying rigidities in adjusting primary revenue expenditures result in fiscal authorities cutting or expanding capital expenditures in line with growth cycles.

Going forward, the increase in development expenditure seen in recent years may be maintained. The states may also focus on cutting down non-development primary expenditure, particularly untargeted subsidies, as the scope for further reduction in the interest payments-GDP ratio may be limited. Further, states may explore ways to increase their non-tax revenues through increases in user charges. Emphasis may also be placed on improving the efficiency of resource use in the medium term. Large revenue surpluses built by some of the states may be utilised to increase capital outlay, particularly for building infrastructure, provided they have adequate fiscal space.

This publication has been prepared in the Fiscal Analysis Division (FAD) of the Department of Economic and Policy Research. The current issue along with past issues is available on the RBI website (www.rbi.org.in). All the articles/studies on state finances from 1950-51 to 2010-11 are also available in a compendium CD, which was released in July 2011. Comments on this publication may be sent to The Director, Fiscal Analysis Division, Department of Economic and Policy Research, Reserve Bank of India, Shahid Bhagat Singh Road, Mumbai-400001. Comments can also be sent via e-mail.

Sangeeta Das

Director

Fiscal consolidation: budgeted revenue surplus lowers gross fiscal deficit and supports higher capital outlay for states. State fiscal consolidation since 2010-11 has been revenue-led through higher own-tax receipts and increased central transfers. For 2013-14, states budget an increased revenue surplus that reduces the gross fiscal deficit while allowing a modest rise in capital outlay; committed expenditure is budgeted to remain stable. The consolidated state debt-to-GDP ratio is projected to continue declining, though risks from a narrowing growth-interest differential and contingent off budget liabilities warrant improved fiscal transparency and disclosure. Capital outlay is pro cyclical, while primary revenue expenditure is largely acyclical.