Indicus Analytics: Getting a fiscal grip

Unlike the Centre, the states have been much better at tightening the fiscal belt

India has for long suffered under high fiscal deficits that rose sharply through the seventies and peaked in the late eighties, crossing the level of seven per cent of GDP. While the nineties saw an average fiscal deficit to GDP ratio of 5.9 per cent, a concerted effort at reduction materialised only in 2003 through the aptly named Fiscal Responsibility and Budget Management (FRBM) Act. Over the past eight years, however, the FRBM has gone through many hiccups and amendments. With the fiscal deficit completely missing its target in 2011-12, there is now an additional loss of credibility that has been quite damaging. Yet, the very existence of the FRBM Act makes a difference since it adds a burden of accountability that benchmarks the government’s actions.

Interestingly, the state governments have been much better at tightening the fiscal belt, though there are exceptions of course. For a comparable fiscal analysis, states have been divided into two categories: 11 special category states – Arunachal Pradesh, Assam, Himachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand. And 17 non-special category states. The two Union Territories with legislatures – the National Capital Territory of Delhi and Puducherry – are marked as memo items in the Reserve Bank of India analysis of state Budgets. The special category states are dealt with separately owing to their topography and socio-economic status; these states are also heavily dependent on the Centre for revenue transfers.

Over the period between 2004 and 2008, within the non-special category states, Odisha, Haryana and Chhattisgarh stood as top performers with an average fiscal deficit to gross state domestic product (GSDP) ratio of less than one per cent, while Jharkhand had the worst fiscal performance with an average fiscal deficit to GSDP ratio of 7.4 per cent. Among the special category states, it was Assam and Tripura that had less than one per cent fiscal deficit to GSDP, while Mizoram came at the bottom with an average ratio of 9.5 per cent. (Click here for chart)

In 2009-10, the hit from the previous year and the implementation of the Sixth Pay Commission recommendations saw most states showing deterioration in the fisc. Tripura was the only state to show a surplus and Jharkhand swung around from its high deficit to turn in a respectable 1.9 per cent ratio.

The following year, 2010-11, saw a mixed performance from the states. In general, the levels of fiscal deficit were higher than what were seen during the 2004-08 period, the good years of the economy. Seven non-special category states showed fiscal deficit to GSDP ratios of less than three per cent — Chhattisgarh, Maharashtra, Andhra Pradesh, Rajasthan, Odisha, Karnataka and Kerala. Three states – Bihar, Jharkhand and West Bengal – came through with deficit to GSDP ratios of more than four per cent. Among the special category states, Arunachal Pradesh, Uttarakhand and Meghalaya were the best performers, but the situation was particularly worrisome in Assam, Sikkim, Manipur and Mizoram where the deficits have crossed eight per cent of GSDP. Looking back over the years, Chhattisgarh and Odisha stand out as states who have kept a tight rein on their fiscal performance.

With a challenging economic environment, some states have managed much better than others to meet the exigencies of fiscal responsibility; unfortunately, the same cannot be said for the Centre.

Indian States Development Scorecard, a weekly feature by Indicus Analytics, focuses on the progress in India and across the states across various socio-economic parameters.
sumita@indicus.net