States may grow at 12% till 2010

The Twelfth Finance Commission (TFC) has estimated that the average gross state domestic product (GSDP) will grow at 12 per cent over the next five years.

Compared with states' projections of own revenue receipts at 6.3 per cent of the gross domestic product, the finance panel has estimated that they will be 7.5 per cent of the GDP in 2005-10. Non-Plan revenue expenditure is estimated to go down to 8.5 per cent, against states' own projection of 10.5 per cent.

Adopting the approach taken in the Tenth Five Year Plan, that states should grow at different rates in order to reduce regional inequalities, it has divided states into three broad categories in terms of their expected growth rates.

Karnataka, Tamil Nadu, West Bengal, Rajasthan, Gujarat, Himachal Pradesh, Goa and Arunachal Pradesh are assumed to grow at a nominal rate of 12.8 per cent with a tax buoyancy of 1.1, while Haryana, Madhya Pradesh, Maharashtra and Uttar Pradesh are projected to grow at 12 per cent over 2005-10 with a tax buoyancy of 1.25.

The former category of states is expected to attain 17.28 per cent growth in tax revenue, while the latter has been assigned a prescriptive tax revenue growth of 14.08 per cent.

Major states expected to grow at 11 per cent over this period include Uttaranchal, Punjab, Orissa, Andhra Pradesh, Bihar, Assam, Jharkhand and Kerala. These states are expected to have a tax buoyancy of 1.30 and tax revenue growth of 13.2 per cent.

The commission has assumed that own tax revenues as a share of gross domestic product will rise from 5.91 per cent in 2004-05 to 6.75 per cent in 2009-10. This implies that the aggregate own tax revenues of states should grow at 15 per cent per year.

The impact of the introduction of value added tax has been assumed to be revenue neutral.

On non-tax revenues, The principal of cost recovery has been adopted for projecting own non-tax revenues resulting in reducing the subsidies implicit in the budgetary provisions.

The TFC has assumed a 7 per cent return on outstanding loans and advances and 5 per cent on equity, to be achieved in a graded manner by 2010.

"The effective rate of return on outstanding loans was extremely low at around 2 per cent in 2002-03 for all states. State electricity boards and state road transport corporations routinely defaulted in interest payments and loan repayments. Similar was the case for dividends as well, where the average rate of return was even lower at 0.6 per cent in 2002-03," the report said.

On interest payments, the TFC has attempted not to provide fully for interest payments arising from large scale borrowings by some states in the past. An average growth rate of 7.5 per cent has been adopted for projections, as against the average growth rate of 18.2 per cent in 1993-03. It has provided a 6 per cent growth rate in the salary component for education and 5 per cent for health. But, a 30 per cent growth has been provided for in the non-salary components. In addition, targeted grants have been provided for these two sectors.

On transfer of committed plan liabilities, it has transferred 30 per cent of plan revenue expenditure in 2006-07 for general category states and 10 per cent for special category states to the non-plan revenue expenditure side in 2007-08. This would help the states in taking up new plan schemes.