Several states have presented their Budgets for 2013-14 in the last couple of weeks. These include Karnataka, Odisha, Uttar Pradesh, Gujarat, Bihar and Madhya Pradesh. Different political parties head the governments in these states, and none of them is ruled by the Congress or any one of its partners in the United Progressive Alliance (UPA), which would present the Union Budget later this week.
Yet, the common themes running across these Budgets are worth recounting. No state finance minister has shown any enthusiasm about restraining expenditure. On the contrary, almost every state finance minister has thought it necessary to point out that even after the proposed increase in expenditure, he would be well within the mandated gross fiscal deficit level of three per cent of their respective gross state domestic product (GSDP). The tone suggests all should be fine as long as the Budget stays within the limit prescribed under the fiscal responsibility and the Budget management law. Karnataka, for instance, raises its Budget size by 14 per cent, Uttar Pradesh by almost 10 per cent and Gujarat by more than 12 per cent. A cap on the states’ fiscal deficit under the law has helped, but only partially. The target has shifted to somehow keeping the gross fiscal deficit below three per cent of GSDP, not recognising that it is only a permissible level of slippage and a more desirable goal would be to reduce the deficit as much as possible.
Another common factor among all these state Budgets is that few of them have gone in for any significant additional resource mobilisation through higher taxes. Karnataka, whose own tax collection record is one of the best among all the states has actually announced a cut in its value-added tax rate on a variety of products. Bihar is an exception here, with higher taxes announced for a host of products, including commercial vehicles and cigarettes. As a result, the share of states’ own tax revenue in their total revenue receipts has seen a marginally declining rate — from 49.2 per cent in 2010-11 to 48.06 per cent in 2011-12. In the current year, that share will be the same at around 48 per cent. Next year might be worse.
It is perhaps this sense of discomfort that fuels the states’ concern over the introduction of the goods and services tax and the consequent abolition of some state-level taxes, without the assurance of full compensation for any revenue loss they might incur. Add to that the Union finance ministry’s recent thinking that there should be a surcharge on individuals earning above a certain income level. That surcharge would not be shared with the states. In other words, the Centre’s tax gains would not automatically result in higher current transfers for states through the tax devolution route. There is also a move to levy a central cess on the sale of petroleum products to finance the government’s specified programmes. Now, even this cess would not be shared with the states.
It is time the states realised that merely adhering to the fiscal deficit cap of three per cent of GSDP will not be enough. They cannot relax on their own tax revenue efforts. Two questions would arise. First, can the states’ combined tax revenue efforts be better than the current level of only about six per cent of the gross domestic product (GDP)? For comparison, the Centre’s gross tax mobilisation is estimated at around 11 per cent of GDP. Second, should the states do something about reducing their increasing dependence on current transfers from the Centre to meet its revenue Budgets? With a Union government that sees the task of reducing fiscal deficit as its biggest challenge, expect from it more moves to mobilise revenue from channels that do not need to be shared with the states. States need to be ready with a response.
Yet, the common themes running across these Budgets are worth recounting. No state finance minister has shown any enthusiasm about restraining expenditure. On the contrary, almost every state finance minister has thought it necessary to point out that even after the proposed increase in expenditure, he would be well within the mandated gross fiscal deficit level of three per cent of their respective gross state domestic product (GSDP). The tone suggests all should be fine as long as the Budget stays within the limit prescribed under the fiscal responsibility and the Budget management law. Karnataka, for instance, raises its Budget size by 14 per cent, Uttar Pradesh by almost 10 per cent and Gujarat by more than 12 per cent. A cap on the states’ fiscal deficit under the law has helped, but only partially. The target has shifted to somehow keeping the gross fiscal deficit below three per cent of GSDP, not recognising that it is only a permissible level of slippage and a more desirable goal would be to reduce the deficit as much as possible.
Another common factor among all these state Budgets is that few of them have gone in for any significant additional resource mobilisation through higher taxes. Karnataka, whose own tax collection record is one of the best among all the states has actually announced a cut in its value-added tax rate on a variety of products. Bihar is an exception here, with higher taxes announced for a host of products, including commercial vehicles and cigarettes. As a result, the share of states’ own tax revenue in their total revenue receipts has seen a marginally declining rate — from 49.2 per cent in 2010-11 to 48.06 per cent in 2011-12. In the current year, that share will be the same at around 48 per cent. Next year might be worse.
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What this means for the states is that they are now relying more on current transfers, which include tax devolution and grants from the Union government. In 2010-11, the share of such current transfers in the states’ total revenue receipts was around 40 per cent. In the following year, it went up to 42 per cent and is set to stay at that level in the current year. This is not yet a big problem area for the states, as they continue to enjoy a revenue surplus. But if their dependence on current transfers increases at the same rate as is happening now, it might pose a problem when the Centre’s tax collections take a hit and the devolution to states comes down. In such a situation, states that have a better track record on the own tax-revenue front would be able to present better fiscal numbers. Already, the states’ fiscal deficit has begun rising from 2.1 per cent of GSDP in 2010-11 to 2.3 per cent in 2011-12. If current transfers come down and the states are forced to seek recourse to higher borrowing, that healthy cushion, too, would be under stress.
It is perhaps this sense of discomfort that fuels the states’ concern over the introduction of the goods and services tax and the consequent abolition of some state-level taxes, without the assurance of full compensation for any revenue loss they might incur. Add to that the Union finance ministry’s recent thinking that there should be a surcharge on individuals earning above a certain income level. That surcharge would not be shared with the states. In other words, the Centre’s tax gains would not automatically result in higher current transfers for states through the tax devolution route. There is also a move to levy a central cess on the sale of petroleum products to finance the government’s specified programmes. Now, even this cess would not be shared with the states.
It is time the states realised that merely adhering to the fiscal deficit cap of three per cent of GSDP will not be enough. They cannot relax on their own tax revenue efforts. Two questions would arise. First, can the states’ combined tax revenue efforts be better than the current level of only about six per cent of the gross domestic product (GDP)? For comparison, the Centre’s gross tax mobilisation is estimated at around 11 per cent of GDP. Second, should the states do something about reducing their increasing dependence on current transfers from the Centre to meet its revenue Budgets? With a Union government that sees the task of reducing fiscal deficit as its biggest challenge, expect from it more moves to mobilise revenue from channels that do not need to be shared with the states. States need to be ready with a response.