TIOL - COB( WEB) - 893
NOVEMBER 09, 2023

By Shailendra Kumar, Founder Editor

FOR most elected governments, democracy and fiscal profligacy go hand in hand! Most politicians, drowned in the elixir of powers, think that democracy and profligacy are like Siamese twins! And such beliefs tend to periodically activate their tongues to go unbridled, particularly, during the polls! In fact, such beliefs are the mother of the acute malady of freebies eroding the foundation of state treasuries. All political parties ill-treat the health of exchequers and go on promising 'fantasies' including sports, yuck, lollipops and pina colada to their assiduously-identified vote-banks which indeed end up voting with their feet for them! Aha! An irrepressible source of cheers during poll agitprop! Such a phenomenon can be seen with its stretched wings in the on-going poll campaigns for the State Assemblies - free gas cylinders, pension to women, stipend to students, free electricity, farm loan waiver, and much more! The State of Madhya Pradesh, just before the Model Code of Conduct came into force, hiked the salary of teachers and neatly piled up a financial mound of Rs 25000 Crore on the State Exchequer! Eek! Jaw-droppingly reckless! A bizarre case of voters electing 'foxes' as watchmen of state 'hen houses'! Dubbing the competitive rush to announce freebies as 'tadka' of populism, the Chief Election Commissioner, Mr Rajiv Kumar, recently commented that it is very difficult for those who win the polls, to implement these fiscal largesse announced during the poll campaigns!

Indeed, how the winning parties are spooked by the rudest of health of state finances can be peeped into from the latest report of the RBI. In fact, a glimpse can also be snatched from the last week affidavit filed by the Kerala Government before the High Court where it admitted that it has gapingly been staring at a 'huge financial crisis'! Uneased by the content of the affidavit, the High Court Bench could not restrain itself from quipping - "Is the State confronting a state of financial emergency?" RBI's report 2023 has revealed that as many as five States - Bihar, Kerala, Punjab, Rajasthan and West Bengal, are highly stressed owing to their back-breaking debt mounds. At least three of them are chronically stressed for a long time! Parsing of datasets further unveils five more states which can be red-flagged - Andhra Pradesh, Haryana, Madhya Pradesh and Uttar Pradesh. Ailment afflicting these states is the unbearable debt burden - interest bills literally draining their budgets and resulting in high fiscal deficit and low capex. Their revenue expenditure under the heads - salary, pension and interest payments, has burgeoned to as high as 85% to 90%, leaving thin resources for capital outlay. Finding no resources for capital expenditure means compromising with growth-inducing assets, productivity and future revenue. A long stride into the tunnel without light!

What are the key risks which may further deepen the strife of decaying health of state finances. Is the new indirect tax regime of GST yet to come to their rescue? What States can do to goose their non-tax revenue mop-up? To dig in for answers of these questions, TIOL Tax Congress 2023 carved out one technical session on the 'State of State Finances'. Opening the session, the anchor, Mr Ranen Banerjee, Partner, PwC, observed that in early 2000s, the health of state finances was bad and the treasuries were often shut for many days in a month. The fortune smiled after VAT was introduced but it is a case of terrifying relapse of bad state of affairs and the public debt has once again skyrocketed in the recent years. When he volleyed his first question at Mr V K Garg, Former Financial Adviser to the then Chief Minister of Punjab, he explained that there are two yardsticks to measure the health of state exchequers - fiscal deficit and the debt to SGDP ratio. He further observed that thanks to the buoyancy in revenue post-2004, the fiscal deficit came down to less than 3% but it slipped into deep trenches during the Covid time. Secondly, there is huge disparity across the States, he added while underlining that the RBI has earmarked five States for their precarious positions. So far as Punjab goes, it has 5% deficit and its debt to SGDP ratio is close to 45%, he quipped.

Elaborating the key reasons for such a perilous state of affairs, Mr Garg observed that every state government follows the malignant policy of spending more, borrowing more and taxing less! He rued that the tax to SGDP ratio has remained constant for many years - no growth at all! Non-tax revenue is barely an issue worthy of flirtations by most state governments! He narrated the case of Punjab where expenditure has sharply zoomed up - salary and pension expenditure put together has been higher than the national average. He noted that salary, pension and interest are committed expenditure which is about 75% in Punjab against the national average of 55%. If power subsidy is added, it is about 93% of the budget expenditure! What may further add to the bowl of woes is the decision of many States to go back to the old pension scheme, he added.

Commenting on the above issues, the second speaker, Prof Ashwini Kumar from Tata Institute of Social Sciences, observed that the mainstream economic thinking in India is not bottom-up albeit the 15th Finance Commission has recommended the same. Secondly, vertical balance between the Centre and the States continues to be out of kilter. Thirdly, the pandemic has severely upended the state treasuries. Even GST has not helped them much as monthly collections continue to be lower than the red-line. It's time for the States to analyse their problem through their own lenses, he added. Reacting to his observations, Prof Kavita Rao of NIPFP, said that GST has not done dramatically well but not too bad either! It has been rising in the past two years and the good news is that States have not suffered much. However, there are quirky variations across the States, ranging between 1.8% to 4.6%, she added.

On her part, the Joint Secretary, Finance, Government of Rajasthan, Ms Namrata Vrishni, attributed low GST collections to two factors - the pandemic and the evolving regime of GST. Owing to COVID-induced disruptions, the state machinery is yet to get acclimatised. It is too early to say how good or bad the GST has been for the States, she added. When the same question was passed on to Mr Rajgopal Devara, the Additional Chief Secretary, Government of Maharashtra, he said that state finances are not that bad as being construed. As per FRBM Act, the fiscal deficit of Maharashtra is much below the range prescribed and its tax to SGDP ratio is pretty good. He preferred to point his finger at the RBI and CAG observations that about 19.8% of gross tax receipts from cess and surcharge tends to bypass the 'belly button' of the divisible pool. Although the States have a right to claim a share but Constitution mandates only the Centre to use them, he added. With a twinge of concern, he also pointed out that there is a need for reforms to ensure that devolution takes place more effectively a la old-fashioned nannying rules. Such an observation becomes more critical in view of the fact that although the 14th Finance Commission pegged the States' share at 42% but data reveals that only 36% went to the States!

On the issue of non-tax revenue, Mr V K Garg observed that it is only about 1.3% in India! If non-tax revenue has to grow, it entails a change in the mindset of politicians who tend to prefer augmenting tax rate on petroleum products rather than doing dozens of other things to garner extra revenue. Enumerating avenues for such revenue, he listed out many heads - tatkal kind of services by the States; renting out of state infrastructure to private players and monetisation of state data through e-auction. User-fee ought to be inflation-adjusted, he added. Commenting on this issue, Ms Vrishni observed that the State of Rajasthan has taken many initiatives like introduction of Integrated Revenue Management System (IRMS), which enables the Exchequer to optimise collections by all revenue-generating departments. Automation helps all departments to share data, she added while emphasising that her State is going to go for AI-based e-tax officer for better compliance. Rajasthan has also upgraded its Integrated Financial Management System which helps the State in keeping a close watch on the revenue generation trends.

To conclude, I would like to observe that all the panellists flagged critical bumps worsening the febrile state of state finances and also rightly admitted that non-tax revenue is unexplored territory for most states. Although some progressive states like Maharashtra have been garnering handsome revenue by monetising its land pool and PSU assets but most states view it as 'Timbuktu' zone and shy away from exploring new avenues for non-tax revenue in lieu of tempting levy of VAT on petroleum products. Clearly, States need a different genre of inflammation in their guts to overcome the crippling fatigue of promising freebies! Unless the mindset of governments undergoes a creative change and desperation leads to innovative ideas as there is no playbook for sure-shot success, this head of revenue would continue to perform below its potential.

Secondly, states need to aggressively audit the quality of their expenditure and focus more on raising their capital expenditure which alone can produce more revenue in the future. Easy borrowing options tend to spoil them and the same can be gauged from the mountainous debts of almost half of the States today. Thirdly, States need to reform property tax system which can richly contribute if one goes by the present pace of urbanisation in India - about 1.5% as per the latest data! One-third of India's population now lives in cities and it is going to be 50% in the coming decade! Besides, States need to explore a raft of user fee-based services which need to be raised periodically or let it be inflation-adjusted right from inception! I sincerely hope that State leaders swimming in the ocean of freebies, including the old pension scheme, wake up sooner than it becomes too late to repair the sinking and haemorrhaging health of State Exchequers! Time to run out of humour! Sacré bleu, belt-tightening time is right here!