All is not well with State finances

Govt resorting to huge borrowings from market to meet growing expenses

The State’s fiscal condition appears to have come a full circle with the economy reverting to trouble over the last two years - akin to the poor fiscal condition in the early part of the decade. Chief Minister B S Yeddyurappa, when he presents the budget proposals for 2010-11 on Friday, he may find it tough to defend the State’s fiscal.

The revenue surplus has reached the lowest ebb of Rs 769 crore while the fiscal deficit has touched the peak of 3.49 per cent (Rs 9,357 crore) of the Gross State Domestic Product (GSDP) in 2008-09 fiscal, since the recovery year of 2004-05. As the surplus position is narrowing down, the Government is creating the fiscal space for itself by increasing fiscal deficit limit and resorting to huge borrowings from market to meet its growing expenses.

The Government has already announced that it will make a provision for further increase of the fiscal deficit up to 4 per cent in the current year to offset the revenue loss caused due to economic slowdown. Though it has secured the legal sanctions by amending the Fiscal Responsibility Act, the State has come under a lot of fiscal stress.
The only solace perhaps is that the Government has managed to spend more on capital expenditure compared to the previous years - Rs 9,639 crore in 2008-09 against Rs 4,288 crore in 2007-08.

Only three years ago in 2006-07, the State had the highest surplus revenue of Rs 4,152 crore, and the fiscal deficit had touched the lowest mark of 1.99 per cent in 2005-06. It is actually hard to believe that the State finances were in shambles in 2001-02, with Rs 5,870 crore revenue deficit and 5.20 per cent fiscal deficit.  The recovery was possible because of some tough administrative reforms like drastic cut in salary expenses, freezing fresh recruitment and checking tax evasion.

For instance, the State’s own tax receipts rose from 7.9 per cent in 2000-01 to 11.60 per cent of the GSDP in 2006-07. But in 2008-09, it declined to 10.73 per cent. Hence, the economic downturn is not alone to be blamed for the finances to go haywire of late.
The mounting expenditure, especially on salary, pension and subsidies, too has played havoc. Expenditure on salary shot up from 3.42 per cent of GSDP in 2005-06 to 4.27 per cent in 2008-09. And it is likely to cross 5 per cent during the current fiscal.

Revenue loss
The Government is spending nearly Rs 1,000 crore more on offering subsidies (mainly power, food, housing, agriculture and others) in the current fiscal compared to the last year. More than Rs 5,000 crore is being spent on subsidies. The State incurred a revenue loss of around Rs 4,000 crore due to economic slowdown. Another indication to the economy going haywire is that the budget estimates on revenue surplus, revenue deficit and capital expenditure and revenue receipts are going wrong since 2008-09. So much so that it failed to raise Rs 2,000 crore from selling its assets (land) in Bangalore.
Let alone cutting down the sagging expenditure, the Government does not seem to be doing anything to increase its revenue by either widening the tax net or introducing new levies. It has not made any effort to recover tax arrears also, which is over Rs 6,000 crore. This was understandable as the ruling party presented the last two budgets with an eye on 2009 parliamentary elections.

Now, the time has perhaps come for the common man to feel the pinch of the fiscal stress. With the Centre intending to prune fiscal deficit in the coming fiscal, the State government, it seems, has no option but to levy tax in 2010-11 to offset the revenue shortfall.
DH News Service

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