New Delhi, That financial health The position of many Indian states is not strong – and their debt burden is preventing them from spending on capital assets – this is a known fact. But now it has prompted the central government to sound the alarm and suggest material changes in the expenditure of the states to prevent the default situation.
Union Finance Secretary TV Somanathan meeting Prime Minister Narendra Modi, along with chief secretaries of states, including Prime Minister Narendra Modi, in Dharamsala between June 15 and 17, made several suggestions to help states improve their finances. These included “rationalization of schemes and autonomous bodies and measures to reduce inefficient subsidies”.
Some of the possible measures suggested by Somanathan to reduce the revenue deficit of the states include periodic increase in property taxes, regularly increasing the duty for various government services like water, and increasing the excise duty on liquor from time to time.
The recommendations were part of a presentation that ThePrint accessed.
In 2021, 15th Finance CommissionThe U.S., too, had stressed the importance of periodic increases in property tax rates by municipalities in line with inflation and growth.
These suggestions come after the Reserve Bank of India (RBI) released a detailed study Last month, in which he highlighted at least 10 states that have seen a slowdown in their own tax revenues, a high share of committed expenditure and rising subsidy burden, their finances have already been strained by Covid-19.
According to the study, the most stressed states are Bihar, Kerala, Punjab, Rajasthan, West Bengal, Andhra Pradesh, Jharkhand, Madhya Pradesh, Haryana and Uttar Pradesh. Most of these states have exceeded their debt levels set by the 15th Finance Commission.
Read also: Why Punjab, Bihar, Rajasthan, Andhra, UP should learn from Sri Lanka to cut debt and free
‘Autonomous bodies, rationalize plans’
During the presentation, Somanathan said states should take a leaf out of the Center’s book and implement some of the recent decisions taken by them last month.
He cited the example of 231 autonomous bodies being taken up by the central government for detailed review. After review, in May 2022, it was decided to reduce, among other things, 112 autonomous bodies through merger, closure and dissolution.
Rationalization, Somanathan said, would not only “cut down unproductive administrative costs” but would also “break up silos among organisations, which are supposed to cooperate with better outcomes and serve the public”.
“States may like to consider a similar course of action, for which the leadership of the chief secretaries will be crucial,” he said.
He said that breaking the silos between cooperating organizations could lead to better results and service to the public.
Similarly, the Finance Secretary suggested that “States may like to consider rationalizing their plans into fewer but better schemes with lower administrative costs”.
He mentioned that, since 2016, 60 out of 130 Centrally Sponsored Schemes (CSS) have been merged into major initiatives and five closed,
It has reduced the number of CSS to 65. For example, 10 schemes of Animal Husbandry Department have been merged into one – National Livestock Development Scheme. He said that this has been done so that the states can use this fund flexibly.
A CSS scheme is one where the expenditure is shared between the Center and the State, generally in the ratio of 6:4.
In 2021, the 15th Finance Commission also did recommended Gradual withholding funding for CSSs and their sub-components that have either outlived their utility or have negligible budgetary outlays consistent with a national programme.
reducing inefficient subsidies
Touted as a major step forward, Somanathan suggested that one of the options for reducing states’ revenue deficit – when the government’s total revenue expenditure exceeds its total revenue receipts – is to reduce inefficient subsidies.
A subsidy is considered inefficient if it is poorly targeted, cannot recover any costs from the beneficiaries, and if it has other side effects such as pollution or excessive water consumption.
“The reduction in such subsidy will be a major step towards the long-term financial health of the states,” the finance secretary said in his presentation.
The Center pointed to free unmetered electricity to farmers as an example of inefficient subsidies. This results in “financial losses and overdues, misuse, theft as agricultural uses, and excessive use of scarce water.
As a solution, the Finance Secretary suggested, “Metering, including prepaid metering, is an important step, even if concessions are given. Prepaid metering is another important step for which the Ministry of Power provides financial assistance.
Recently, the Aam Aadmi Party (AAP) government was formed in Punjab. criticized To provide free electricity up to 300 units to all households in the states, as this would create inefficiency in the system and add to the financial woes of the state.
Read also: Free electricity and no new taxes in AAP’s Punjab budget, but fiscal consolidation roadmap missing
The increase in debt in the states is worrying
The presentation took a detailed look at the state’s finances and highlighted the worrying rise in debt in some states.
For example, the annual rate of outstanding liabilities (excluding off-budget lending and power sector dues) between 2015 and 2020 was highest in Telangana (30.6 percent), followed by Chhattisgarh (22.5 percent), Odisha (21.7 percent). ) is the location. , Arunachal Pradesh (20.9%) and Tamil Nadu (19.2%).
The outstanding liabilities as a ratio of the state’s GDP in 2019-20 was highest for Nagaland at 47 per cent and Arunachal Pradesh and Punjab at 43 per cent. For some 21 states, the outstanding liability to GSDP or states’ income was more than 25 per cent in 2019-20.
Since 90 per cent of the state’s revenue is being spent in the form of subsidies on revenue expenditure such as salaries, pensions, freebies, it is preventing states from spending on capital formation, which has a more multiplier effect on development.
States such as Punjab, Kerala, West Bengal and Maharashtra spent only up to 10 per cent of their total budget outlay on capital expenditure between 2015-2020. This compares to the Centre’s outlay for capital expenditure at about 18 per cent of their total expenditure.
In a better position, Odisha spends 21.2 percent of its total budget outlay on capital expenditure, Uttar Pradesh 18.5 percent, Bihar 18 percent and Gujarat and Jharkhand 17.8 percent.
(Edited by Jinnia Ray Chowdhury)
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