Some states including Punjab may find its difficult to meet their fiscal targets during 2011-12 on account of moderation in economic outlook and failure to curtail expenditure,says a report by ratings firm ICRA. "A few state governments may find it difficult to meet the fiscal targets set by the 13th Finance Commission in 2011-12," ICRA said in a report 'Fiscal Consolidation',released today. The report examines the finances of six state governments - Andhra Pradesh,Gujarat,Karnataka,Maharashtra,Punjab and Tamil Nadu - in which ICRA has rated the debt of a number of government entities. "The Budget Estimates for 2011-12 of Andhra Pradesh,Gujarat,Karnataka and Maharashtra broadly indicate that these States would be able to adhere to the fiscal targets of balancing the revenue account and restricting the financing gap to 3 per cent of GSDP in 2011-12," ICRA said. However,Punjab is likely to miss the target and register a deficit of 3.45 per cent. The fiscal targets set by the 13th Finance Commission require 19 of the 28 States to eliminate revenue deficits and curtail financing gaps - defined as revenue balance plus capital receipts minus capital outlay and net lending,to 3 per cent of gross state domestic product (GSDP) in 2011-12. ICRA said that while some states have put in place measures to augment revenues during the last two years,the slowdown in economy and rising expenditures may hinder their fiscal target plans. ".the moderating macroeconomic outlook is likely to have a considerable bearing on the pace of revenue growth in the near term,even as the ability of the state governments to curtail the growth of committed expenditures is likely to be limited. "Accordingly,some states may find it challenging to report revenue surpluses in 2011-12," ICRA said. It said sales tax collections of state governments are likely to report moderate growth in 2011-12. "The adverse impact of the weakening consumption demand on growth of sales tax revenues is likely to be partly offset by the prevailing elevated price levels," it said. However,a number of states are likely to restrict their financing gap to below 3 per cent of GSDP but some of them may need to defer or cancel discretionary capital expenditure in order to achieve this target,according to the report. ICRA said that expenditures such as salaries and pensions are likely to expand considerably,following increases in the rate of dearness allowance,which reflect the sustained high inflation in the country. Besides,interest payments are likely to rise on account of considerable accumulation of debt in the recent years and hardening interest rates. "Power subsidies are likely to remain elevated in 2011-12,given the rising cost of domestic and imported coal and a tight fuel availability situation. "Moreover,food subsidies are likely to rise in some states that have recently reduced the retail price of subsidised grains," ICRA Senior Vice-President and Co-Head (Corporate Sector Ratings) Jayanta Roy said. The report said that expenditure control will remain crucial over the medium term for a sustainable structural improvement in the financial health of state government and for augmenting the fiscal space available for capital expenditure and infrastructure creation. ". over the medium term,policy decisions regarding issues related to land acquisition and availability of a land bank,besides other pro-industry policies,would influence the relative pace of industrialisation and economic growth among states. This would largely determine their economic prospects,employment creation,income levels and tax revenues," it said. The ratings agency also said that the proposed switchover to the Goods and Services Tax (GST) will have a positive impact on the states' revenue receipts over the medium term,besides expanding the tax base. "Losses accruing to the States because of the switch to GST,if any,are expected to be at least partly compensated by government of India in the initial years following the switch to the GST regime," the report said. It expressed concern,however,about the likely impact of the accumulated losses and rising debt stock of the state power utilities on the fiscal health of the State Governments. It said that delays in introducing power sector reforms and inadequate increases in power tariffs may necessitate significant financial support from the state governments to address the weak financial health of the power utilities. "Such support may further jeopardise the ability of the state governments to achieve the fiscal targets of maintaining a balanced revenue account and curtailing the financing gap to 3 per cent of GSDP," ICRA said.
