There are indications of the coming Union Budget giving a new deal to states in the form of a higher share of the Centre’s gross tax revenues and also greater freedom as far as spending of Central assistance monies go.
But all this may not be enough when it comes to three fiscally stressed states: West Bengal, Punjab and Kerala. Given their consistently high fiscal and revenue deficits relative to other states, they would probably require more than just a new deal.
Unlike most states now feeling the pinch from the economic slowdown impacting their revenues — both own as well as the share from Central taxes — the problems of the three are structural, considering that they ran large deficits even during the very high growth period during 2003-04 to 2007-08.
Last September, the Kerala government had to avail of an overdraft to borrow Rs 100 crore from the Reserve Bank of India. While this was the first time in a decade it used this facility — which goes beyond normal ways and means advances to tide over temporary cash flow mismatches — Punjab has been resorting to overdrafts every single year since 2008-09. West Bengal has the dubious record of being in overdraft seven times in 2010-11. The fiscal woes of the three states owe primarily to two factors.
The first is the burden of past debt. West Bengal’s outstanding liabilities of Rs 2,50,000 crore are about 38 per cent of its gross state domestic product (GSDP), as against 22 per cent for all states. Punjab’s debt at Rs 102,000 crore is similarly 32 per cent of GSDP. Kerala’s ratio is a bit lower at 29 per cent, though the absolute debt is close to Rs 1,20,000 crore. The high debt burden results in huge outgo on interest and repayments, leaving little for development projects or capital expenditures.
The second is spending on salaries and pensions. In 2013-14, Kerala’s expenditure on these two items totalled Rs 28,950 crore, — 70 per cent of the state’s revenues and 52 per cent of all revenue receipts.
In Punjab, the situation is so bad that the state treasury is said to have been verbally instructed to go slow on clearing bills other than salaries. Despite that, the state has been struggling to pay employees on time. Post-retirement benefits are being delayed, while pensions haven’t been disbursed to the elderly, widows and destitutes for the past few months.
The current fiscal crunch has also led to Kerala diluting its earlier plans to implement prohibition in a phased manner. Thus, Sundays will no longer be dry days as originally envisaged, while the 418 bars that were closed down last April have now been allowed to serve beer and wine.
West Bengal and Punjab, on their part, have sought either waiver or restructuring of past debts through extension of repayment tenure and lower interest rates.
However, Soumya Kanti Ghosh, chief economic adviser at State Bank of India, feels that any special package for the three fiscally stressed states should be conditional upon their additional resource mobilisation efforts. West Bengal’s own tax revenues are just 4.8 per cent of its GSDP, compared to 9-10 per cent for Tamil Nadu or Karnataka.
Besides, there has to be action on rationalisation of subsidies. Punjab, for instance, has budgeted the subsidy on free power to agricultural consumers for 2014-15 at Rs 4,455 crore “The subsidy issue has to be addressed. There has to be agreement on what and whom really to subsidise,” said C Rangarajan, who headed the 12th Finance Commission.