Combined Finances of Union and States and the Issue of Fiscal Space Pinaki Chakraborty National Institute of Public Finance and Policy New Delhi

Focus of the Chapter Analysis of Union Finances for the year 2017-18 To quantify the effect of enhanced devolution and flow of grants on subnational fiscal space To examine what has happened to social sector expenditure at the state level, especially on health and education.

Finances of the Union and State Governments: Revenue Deficits Note: Surplus (+) / Deficit (-) Revenue Deficit in 2013-14 Revenue Deficit in 2014-15 Revenue Deficit in 2015-16 Revenue Deficit in 2016-17 RE Revenue Deficit in 2017-18 BE Chh, Goa, Har, HP, Ker, Mah, Miz, Pun Raj, TN, WB AP, Ass, Chh, Har, HP, J&K, Jha, Ker, Mah, Miz, Pun, Raj, TN, Utt, WB AP, Har, J&K, Ker, Mah, Pun, Raj, TN, Utt, WB AP, Ass, Har, HP, Ker, Mah, Nag, Pun, Raj, TN, Utt, WB AP, Har, HP, Ker, Mah, Pun, Raj, TN 11 States 15 States 10 States 12 States 8 States

Finances of the Union and State Governments: Fiscal Deficits Note: Surplus (+) / Deficit (-) 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 RE 2017-18 BE FD > 3% 9 states 7 states 7states 14 states 12 states 19 states 11 states

Central Transfers to States: Tax Devolution & Grants-in-Aid

Trends in Aggregate Central Transfers Composition of transfers have changed in favour of untied and formula based transfers (i.e., tax devolution) Untied tax devolution account for 56.8% of total central transfers to States in 2017-18BE

Trends in Central Transfers While all States benefitted from increase in tax devolution in 2015-16 vis-à-vis 2014-15. Many of them experienced a reduction due to restructuring of central grants to states. Total central transfers to States (including those going outside the State budgets) as percentage of GSDP declined in 9 states

States’ Own Revenues There has been a decline in own revenues aggregated across all States as percentage of GSDP between 2011-12 and 2017-18BE mainly due to the fall in own tax revenues. Between 2014-15 and 2015-16 own-tax revenues as percentage of GSDP declined in 19 States. AP, Chhattisgarh, Gujarat, Jharkhand, Karnataka, Kerala, MP, Maharashtra, Punjab, TN, UP, WB, Arunachal Pradesh, Manipur, Meghalaya, Nagaland, Sikkim, Tripura and Uttarakhand. The decline in own tax revenues is due the decline in revenues from State Sales Tax/VAT and State Excise which together account for about 75 percent of states’ own tax revenues

Trends in Expenditures The increase in expenditures between 2014-15 and 2015-16 is largely driven by the increase in capital expenditure Capital expenditure increased from 2.27% of GSDP to 2.49%, the increase in revenue expenditure was 0.06% of GSDP. But 12 states show a decline in capital expenditure as percent of GSDP during this period (Assam, Gujarat, Karnataka, Manipur, Meghalaya, Mizoram, Nagaland, Punjab, Sikkim, Tamil Nadu, Tripura and Uttarakhand)

Trends in Expenditures In 2017-18BE, both Revenue and Capital expenditure are budgeted to increase to 14.57% and 2.79% of GSDP respectively. Capital expenditure on general services as percentage of GSDP has largely remained unchanged between 2014-15 and 2017-18BE. The entire increase in capital expenditures is primarily due to the increase in capital expenditure on economic and social services as capital expenditure on general services (as % of GSDP) has largely remained unchanged during this period. Capital expenditure (% of GSDP) on Social Services: 0.53% in 2014-15 to 0.70 % in 2017-18BE Economic Services: 1.58% in 2014-15 to 1.92% in 2017-18BE General Services: 0.13% in 2014-15 to 0.15 % in 2017-18BE

Trends in Expenditures Between 2014-15 and 2016-17, total expenditure as % of GSDP on General services: declined from 4.46% to 4.08% percent Social services: increased from 5.81% to 6.71% and Economic services: increase from 4.98% to 5.51% The increase in social services expenditure is due to increase in expenditures in urban development, water supply and sanitation, housing, and welfare of SCs, STs and backward classes

Public Expenditure: Social Services State-specific variations in Y-to-Y: 2014-15 to 2015-16 Social Sector Expenditure/GSDP [Education, Health & Social Services] declined in the following States Education, Health & Social Services: Andhra Pradesh, Meghalaya Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand (7 states) Education & Health: Himachal Pradesh and Karnataka (2 states) Education & Social services: Assam, Chhattisgarh, Gujarat, Maharashtra, Manipur, Tamil Nadu and West Bengal (7 states) Health & Social services: Arunachal Pradesh (1 state) Education: Haryana, Kerala, Madhya Pradesh and Rajasthan (4 states)

Expenditures on Social Services General Category States Correlation Coefficient between Education-Health 0.811 Education-Social services 0.896 Health-Social services 0.762 Note: Based on Average of per capita expenditures for 2014=15 and 2015-16. Does not include Goa.

Expenditures on Social Services NE&H States Correlation Coefficient between Education-Health 0.891 Education-Social services 0.983 Health-Social services 0.936 Note: Based on Average of per capita expenditures for 2014=15 and 2015-16.

General Category States Correlation Coefficient between Relation Between PCGSDP & Per capita Expenditures on Social Services – General Category States General Category States Correlation Coefficient between PCGSDP-Education 0.869 PCGSDP-Health 0.806 PCGSDP-Social services 0.883 Note: Based on Average of per capita expenditures for 2014=15 and 2015-16. Does not include Goa.

Correlation Coefficient between Relation Between PCGSDP & Per capita Expenditures on Social Services – NE&H States NE&H States Correlation Coefficient between PCGSDP-Education 0.726 PCGSDP-Health 0.623 PCGSDP-Social services 0.680 Note: Based on Average of per capita expenditures for 2014=15 and 2015-16.

Outstanding Liabilities Outstanding liabilities as % of GSDP declined from 23.60% in 2011-12 to 22.31 per cent in 2014-15 Increased to 23.31% in 2015-16 and to 24.13% in 2016-17RE In 2015-16, 18 States report an increase in outstanding liabilities, while 17 States budget for an increase in 2016-17RE. The increase in 2015-16 and 2016-17 could attributed to UDAY Moreover, the new framework of borrowing recommended by FFC provided additional borrowing. 9 states eligible for additional borrowings of 0.25% and 7 states for 0.50% in 2016-17

Outstanding Liabilities

What are the key findings? Post-FFC award rise in untied fiscal space in aggregate though a few states have experienced a decline in transfers when “Actuals” of 2014-15 is compared with “Actuals” of 2015-16, 2016-17 (RE) and 2017-18 (BE). Share of untied transfer in total transfer has increased along with an overall increase in transfer when compared with 2014-15. Own revenue to GSDP ratio is expected to remain flat when compared with 2015-16 Aggregate expenditure shows an increase of more than 1.15 per cent of GSDP between 2015-16 and 2017-18 (BE).

What are the Key Findings? During the same period FD is expected to decline from 3.10 percent to 2.66 per cent of GSDP. 2017-18 fiscal stance at the state level seems to suggest that states are reverting back to the FRA target of 3 per cent FD and achieving balance/surplus in revenue account.

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