Crisil Cautions Maharashtra On Fiscal Deficit

The Credit Rating Information Services of Indias(CRISIL) recent study has deplored Maharashtra governments tendency to divert surplus on capital account to finance revenue deficit.The fear is the deficit may become unmanageable at some point of time in future. Major infrastructural projects may suffer for want of funds, thus affecting long term prospects of the state economy.

The immediate fallout seems to be either postponement of projects or stalling them. Maharashtra State Electricity Boards Khaparkheda power project, BSESs Dahanu Thermal II expansion plan, Jayagad Port Development project and Krishna Valley Development project are among the affected ones.

Capital account surplus rose from Rs 329 crore in 1994-95 to Rs 1525 crore in 1996-97( RE) but declined to Rs 1292 crore in 1997-98 (BE).

 

In 1997-98 (BE) the government showed a budget surplus of Rs 586 crore. In 1997-98 (BE) capital receipts declined to Rs 4,790 crore from Rs 5,087 crore in 1994-95. However, during the same period the capital expenditure declined to Rs 3,498 crore from Rs 4,758 crore.

In 1997-98 (BE), gross fiscal deficit of 26 states has increased by 8.8 per cent Maharashtra accounted for 8.2 per cent of total gross fiscal deficit of 26 states in 1997-98 (BE) as against 13.2 per cent in 1995-96 and 12.5 percent in 1996-97(RE).

The share of Maharashtra in total revenue of all states has declined to 12.1 per cent(12.4 per cent) in 1997-98 (BE).However, its share in total expenditure has also declined to 11.5 per cent from 12.2 per cent in the same period. In 1997-98 (BE) Maharashtras share of total capital receipts of all states declined to 8.9 per cent (11.5 per cent) and its share of capital expenditure to 8.8 per cent (10.9 per cent).

The diversion of surplus from capital account to finance revenue expenditure has not done much to spruce up state governments fiscal shop. Its revenue receipts rose by 8.9 per cent to Rs 21,295 crore (Rs 19,546 crore) in 1997-98(BE), whereas revenue expenditure increased by 4.5 per cent to Rs 22,001 crore (Rs 21,045 crore). In 1995-96 revenue receipts increased by 13.5 per cent and expenditure by 19.7 per cent.

Gross fiscal deficit has risen from Rs 2861 crore in 1994-95 to Rs5240 crore in 1996-97,up a hefty 83 per cent. The budget estimate for 1997-98 showed gross fiscal deficit of Rs 4030 crore.

Gross fiscal deficit is arrived at after adjusting for borrowings and other liabilities. Borrowings have gone up from Rs 3468 crore in 1994-95 to Rs 5266 crore in 1996-97 (RE), up 52 per cent. The budget estimate for 1997-98 is lower to Rs 4616 crore. The share of borrowings in gross fiscal deficit has gone up from 88.7per cent in 1996-97 (BE) to 114.5 per cent in 1997-98(BE).

Yashogandha Sant, an analyst and a watcher of Maharashtras economic scene says, The budgetary position of the state government reflects some major structural weaknesses. A matter of particular concern is the deficit on revenue account.The widening gap revenue gap has serious implications for the state fiscal scenario of the state. It is expected to lead to an increase in borrowing requirements, accumulation of debt, rise in interest payment and a progressive pre-emption of resources available for capital formation. Revenue deficit has increased from Rs 612 crore 1995-96(RE) to Rs1500 crore 1996-97 (RE).The 1997-98 (BE) is pruned to Rs 705 crore, much too optimistic.

In the total revenue receipts, sales tax revenue accounts for about 40 per cent. In 1997-98(BE) the sales tax revenue increased by 18.4 per cent, the highest, to Rs 8829.5 crore (Rs 7,460 crore). This was owing to the assumption of full years impact of revision in the taxation structure and increase in price of petrol and petroleum products during the current year.

In the case of Maharashtra the existing pressure on the revenue budget has worsened as a result of the dismal financial performance of the state level undertakings as user charges fail to cover cost. Reserve bank of India has urged the states to tone up functioning of the state level undertakings as well as to rationalise user charges in respect of power, transport, irrigation and other services. How far the states including Maharashtra will show the necessary will power to act on this suggestion depends on the political economy of the entrenched interest groups.

A meaningful fiscal correction hinges on increasing user charges on public utilities, phasing out of hidden subsidies as well as their targeting More than that it is essential to control expenditure as mere tax reforms may not be adequate to ensure fiscal correction.