Solid state growth

There can be little doubt that the stunning cash surplus with states (Rs 31,000 crore, according to a report in this newspaper) is due to a combination of fortuitous circumstances.

With the discontinuation of the debt swap, the Centre is no longer withholding large chunks of the money raised through small savings""this alone would mean Rs 30,000 crore extra for the states in a full year.

Add to this the increased releases made by the finance ministry of cash balances in the National Small Savings Fund. Similarly, increased grants thanks to the Finance Commission, higher in the first year of a new commission, add up to another Rs 12,000 crore for the full year.

Of course, the flip side of this is that states will no longer get Rs 20,000 crore of Plan loans from this year onwards.

The larger issue then is whether the fiscal correction that we're seeing can continue. Compared to 4.4 per cent in 2003-04, the states' fiscal deficit is projected to be around 3.1 per cent this year, and the revenue deficit is projected to drop from 2.2 per cent to 0.7 per cent.

While there can be some doubt as to whether the fiscal deficit target for the year will be met, the revenue target looks simpler if only because the revenue projections assume lower tax devolution from the Centre (the states assumed they would get Rs 87,160 crore as their share of the tax kitty, while the Budget puts this number at Rs 94,959 crore).

Similarly, once all states legislate on a fiscal responsibility bill, they will be entitled to lower interest rates on central government debt and this adds up to Rs 4,000-5,000 crore. Similarly, sticking to the revenue deficit reduction targets set by the Finance Commission will yield another Rs 7,000 crore a year.

And while it is obvious the numbers will differ from one state to another, there is a quantum leap in the revenue collections of states as well. While such revenues accounted for 11.2 per cent of GDP in 2003-04, they are projected to be around 12.1 per cent in 2005-06, and the increase is equally shared between the states' own tax revenues and their share of the central kitty.

The fact that just four states have applied to the finance ministry for VAT compensation despite the generous baseline assumptions allowed (any state's projected tax revenues were to be inflated by a growth equal to the average of the best of three of the last five years), also indicates that post-VAT revenues are doing well.

As far as expenditures are concerned, the picture looks equally solid. Expenditure is to drop from 18.7 per cent of GDP in 2003-04 to 16.3 per cent this year. About 0.2-0.3 percentage point reduction is expected on account of interest payments alone as the states get eligible for lower interest loans as well as borrow more from the market.

Of course, the flip side of this is a large compression in capital expenditure by states. This, needless to say, is what is showing up in the increasingly poor quality of infrastructure in various states. While the quality of spending continues to remain an area of concern, there is little doubt that the states' fiscal situation is on the mend.