Disastrous course

From a revenue surplus of about Rs 1,500 crore in 1980-81 to a revenue deficit of around Rs 50,000 crore in 2003-2004, the story of state finances (as compiled recently by the Reserve Bank) is a depressing one. The states' fiscal deficit has increased from Rs 3,700 crore to Rs 1,16,000 crore.

The two sets of figures together tell us that, where 40 per cent of capital expenditure was financed through non-debt creating receipts, the states have moved to a position where almost half the fiscal deficit is being used to finance revenue expenditures. How has this fiscal disaster come about?

In the last 25 years, the combined expenditure of the states has increased 22 times. During the same period, the states' own revenues (excluding central transfers of all kinds) have kept pace and show an increase of 22 times.

What this means is that the states' own revenues continue to finance about 42 per cent of their expenditure. In the absence of any other change, the fiscal balance of the states should have been the same as in 1980-81, which it obviously is not.

The non-debt transfers from the Centre (devolution, statutory grants and Plan grants) have also increased almost 22 times from Rs 6,400 crore to 1,37,000 crore. So where is the catch?

In 1980-81 the gross devolution of the Centre to the states was Rs 9,500 crore and net devolution was Rs 7,200 crore. In 2003-04, the gross devolution was Rs 1,60,000 crore and the net devolution Rs 1,02,000 crore.

In other words, transfers from the states to the Centre have increased from Rs 2,245 crore to Rs 57,500 crore. In 1980-81, the net to gross devolution ratio was 76 per cent, which has dropped to 64 per cent.

What this means is that for every rupee that the Centre transferred to the states, it got back 24 paise in 1980-81; now it is getting back 36 paise as servicing. This has dented the revenue account balance of the states. This drop has been met through borrowings, which has worsened matters.

The states contributed their bit to making a mess of their finances. In 1980-81, the share of capital expenditure in the total expenditure was more than one-third; this is now less than one-fourth.

Capital expenditure used to be 53 per cent of revenue expenditure in 1980-81; in 2003-04, it was barely 27 per cent, half of what it used to be. With such a sharp cut in capital spending, it is not surprising that there has been no capacity creation and the delivery of services has suffered.

This has had a long-term impact on revenue generation. For, even as the states' own revenues have kept pace because of very high buoyancy in tax revenues, non-tax revenues (which are primarily user charges) have stagnated.

In 1980-81, non-tax revenues at Rs 3,200 crore were half of tax revenues, now these are less than one-fourth. Had the states ensured that non-tax revenues grew at the same rate as taxes, it would have been a different story. Blame the tendency to offer farmers free power and virtually free water.