People in Bihar woke up on Wednesday to a shock, with more than snacks to chew over. The Nitish Kumar government imposed higher taxes on various items including packaged food, dry fruits, flour, refined flour, auto parts, inverters and batteries, saris, sand, cosmetics and mosquito repellents. Even edibles such as potato chips, sweets, samosas and kachauris were not spared.
The decision, which invited criticism from people and Opposition parties, was termed necessary by the government for funding development projects. "These are mainly luxury items, used by the affluent. It will enhance revenue collection of the government, which would be used for the all-round development of Bihar," said Brajesh Mehrotra, Principal Secretary, Cabinet Secretariat.
However, sources say the real reason behind the decision is to minimise the impending revenue loss that would result from the partial ban on liquor from the next fiscal. The government has decided to ban the sale of country and spiced liquor and shut down almost 90 per cent of the liquor shops in Bihar from April 1, which is estimated to cost around Rs 2,000 crore to the state exchequer. The government is trying its best to make up for the losses by tapping other sources. However, the step to impose taxes, despite being wide and far-reaching, would mop up only Rs 430 crore in a year. This shows that the financial problems are too many and too big for the state government to cover.
Given the additional burden of Rs 30,000 crore due to the change in funding pattern in Centrally Sponsored Schemes (CSS) and impending pressure on the state exchequer for implementation of the Seventh Pay Commission recommendations, the government will be neck deep in trouble. The total burden on the state coffers over the next five years to fulfil poll promises is expected to be Rs 2.7 lakh crore.
It means that Bihar, one of India's poorest states, is looking at a financial shock in the coming month, when the Maha Gathbandhan (Grand Alliance) government will present its first Budget. The government may impose new or increased taxes to compensate for losses and has to borrow more to fund development projects. It also means that Bihar will have to reduce spending on social services to foot the bill of other projects.
"It will be nothing short of a tightrope walk for the government," said a secretary-level IAS officer about budget-making. "The partial liquor ban is expected to cost us Rs 2,000-2,500 crore a year. Then, there is the issue of additional burden on the state government due to change in funding pattern in CSS. There has been a major reduction in important schemes related to child development, health, education, rural electrification, rural road and rural and urban housing. The state will have to fund these schemes. The state will have to implement the recommendations of the Seventh Pay Commission, which will further drain its resources. The implementation of the chief minister's poll promises would cost at least Rs 20,000-30,000 crore in the initial year. So, Bihar's financial health is bound to suffer."
Overall, 56 per cent of Bihar's total revenue of Rs 1.20 lakh crore comes from central taxes and grants. Only 25 per cent comes from its own taxes. Bihar's revenue receipts, although growing at a commendable rate, are not sufficient to meet the government's needs in the coming years. The partial prohibition is expected to make a dent in tax revenue in the next fiscal, which is estimated to grow by 20 per cent to Rs 30,875 crore in 2015-16 (from Rs 25,662.9 crore in 2014-15). Public debt, which has doubled between FY 2012-13 (Rs 9,553.96 crore) and FY 2015-16 (Rs 17,708 crore), is expected to go up further. As the state is hovering around the ceiling imposed by the Fiscal Responsibility and Budget Management Act, 2003, it will be difficult for it to borrow more aggressively.
The central schemes earlier used to finance several development projects in Bihar, but after the cut in Centre's share, Patna will now have to spend more on these projects. Despite the dire need to reduce money it spends on running itself, the state would be unable to do so because of the pending implementation of the Seventh Pay Commission recommendations. The state government will have to spend more on account of the revenue expenditure, expected to cross Rs 1 lakh crore.
The CM has already announced that the government would begin rolling out student credit cards, skill development schemes, unemployment allowances and Wi-fi in colleges and universities campus from the next fiscal year. Plus, it will also spend handsomely on road connectivity, electricity, drinking water and sanitation for all. Overall, the unofficial estimates of the first year's expenditure on these schemes are around Rs 25,000-30,000 crore.
Therefore, analysts feel the government may further hike the taxes to get more resources. "This is the first year of the government, so it can take some tough decisions. VAT on petroleum products, vehicles and luxury commodities might be hiked further. However, it will not be easy to increase tax rates after an extent because it is a coalition government. Therefore, it will have to look beyond tax hikes," said a senior analyst. It means it will have to cut funding where it matters the most - the social sector. The government may reduce spending on social services from Rs 38,080 crore, which it has earmarked for the current fiscal.
Education and road construction may get the lion's share in the state's planned outlay. Bihar has a literacy rate of 63.8 per cent against the national figure of 74 per cent. On the other hand, Bihar, home to 8.6 per cent of India's population, has only 4.9 per cent of state highways.
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