State Finances Both Improve, Deteriorate
The quality of spending is a source of concern
A Reserve Bank of India (RBI) report on state finances reveals fiscal consolidation accompanied by “modestly improved” quality of budgeted expenditure. The good news is that there is notable improvement in the ratio of development expenditure to gross state domestic product (read: output) in the low-income states. The bad news is that as per the 2015-16 state budgets, there has been a decline (over the previous year) in projected revenue expenditure under such important heads as housing, water supply and sanitation, rural development, irrigation and flood control, etc. Capital expenditure is budgeted to decelerate as well.
The RBI report mentions that the increase in the states’ share of tax devolution from 32% to 42% of the divisible pool, on the recommendation of the Fourteenth Finance Commission, actually works out to a decline in central transfers (share in central taxes plus grants-inaid) by 0.3% of GDP in 2015-16, due to discontinuance of many centrally sponsored schemes. While many such schemes on state subjects have been delinked from central support, those representing national priorities like poverty alleviation, and those backed by cess, do continue. The report adds that the states need to provide greater fiscal space for development expenditure on health and education by augmenting revenue generation, levying reasonable user charges, boosting performance of state public sector units and, in particular, by improving realisations from state power distribution utilities.
Power utility finances call for greater focus and transparency. Note that the RBI report is only able to provide woefully dated figures. It says aggregate technical and commercial losses in power distribution have come down from 26.4% in 2010-11 to 22.7% in 2013-14, but provides no update. Without thoroughly improved power utility finances, which need to be published on a quarterly basis, state finances are bound to deteriorate. A major public finance challenge to tackle populism and politically mandated power tariffs and giveaways.