With all the media song and drama around the Union Budget and the hype and hope vested in it, there is a woeful lack of public discussion about state government finances. In India’s federal system, the state of state finances is equally important for the stability and sustainability of the growth process. One reason why there is less media attention on state finance could be that state governments have long ceased to impose fresh taxes, depending increasingly on handouts from the Centre for their expenditure obligations. More recently, however, another reason is that most states have been running a revenue surplus, cutting their coat according to their cloth. This does not mean that they have adequate fiscal resources, but that many states, in fact, spend far less than they should, especially in critical areas like education, health care and rural development. Given the general neglect of state finances, it is gratifying that the Reserve Bank of India (RBI) continues to publish a professionally competent and exhaustive study of state finances. The latest report on state finance for fiscal 2009-10 draws attention to the recent deterioration in the otherwise healthy state of state finances. According to the report, published this week, while the consolidated revenue balance of the states showed a surplus in the past three years, in fiscal 2009-10, states had budgeted for a deficit, reflecting, as RBI says, a deterioration in the revenue account of state governments. While the debt-GDP ratio of state governments declined to 26.2 per cent in 2008-09 from the peak level of 32.8 per cent in 2003-04, gross fiscal deficit as a percentage of GDP was estimated to be higher at 3.2 per cent in 2009-10 as compared with 2.6 per cent in 2008-09 and 1.5 per cent in 2007-08. The implementation of the recommendations of the Sixth Central Pay Commission and of states’ own pay commissions would further impact state deficits.
RBI is right to be concerned about the decline in the states’ own tax revenues, even though this concept of “own tax” is a dubious one since, under the Constitution, a share of the direct and indirect taxes collected by the Centre legitimately belongs to the states, with a Constitutional body, the Finance Commission, determining the share from time to time. The central bank is right to suggest that state governments need to augment their revenues through improved tax collections, as well as take measures to check under-valuation of property to improve collections under stamp duty and registration fees, and phase out exemptions under sales tax. On the non-tax front, the RBI report says, the states’ “own non-tax” revenue, at around 10 per cent of the total revenue receipts, is low by international standards. The states have been advised to increase their reliance on non-tax revenues by levying appropriate user charges such as time-bound revision of water supply tariffs, introduction of user charges in health, education and veterinary services, and cost recovery from social and economic services. All this, and much more in this competent study, is sound advice. What is needed is political will at the state level. For his part, Union Finance Minister Pranab Mukherjee can play a leadership role by setting an example in fiscal responsibility that state finance ministers can follow.