IV. Government Finances (Part 1 of 2)

RbiAnnouncementWeb

Asset Publisher

প্ৰকাশ কৰা তাৰিখ 27 আগষ্ট 2003

listen

IV. Government Finances (Part 1 of 2)

Central Government Finance,2002-03
State Government Finances,2002-03²
Combined Budgetary Position of the Center and States

4.1 The slowing of economic activity due to the drought impacted on public finances in 2002-03. In the revised estimates, the combined gross fiscal deficit of the Centre and States overshot its budgeted level by more than one per cent of GDP on account of the shortfall in tax revenue and disinvestment from budget estimates. Furthermore, the imperatives for food supply management in the context of the drought necessitated fiscal support in the form of higher food subsidies, which surged back almost to 1991-92 level as a proportion to GDP. Despite these setbacks, there were distinct gains in expenditure management. The Centre reined in its expenditure by pruning non-plan spending. On the other hand, the States' expenditure exceeded budget estimates, but this was mainly in the form of a spurt in capital expenditure towards debt consolidation. Importantly, States were able to contain the revenue expenditure around the budgeted level. Notwithstanding these modest successes in expenditure containment, the slippages from the budgetary projections underscore the deterioration in the quality of fiscal adjustment.

4.2 The tax-GDP ratio has been losing buoyancy over the 1990s, falling by more than two per cent of GDP by the year 2001-02 from the level attained in the late 1980s. This imparts urgency to reforms in the tax regime in the form of simplification of rules, widening the tax base, reviewing exemptions and improving compliance. The surge in interest payments following reforms in budgetary financing has continued unabated, and it is only in 2002-03 that some moderation in pace has set in. The steady improvement in the primary deficit coupled with fall in capital outlay during the 1990s indicates that the burden of the unrelenting expansion in interest outgoes has devolved on productive elements of fiscal spending. The overarching priority attached to reduction of expenditure to meet deficit targets has accentuated the erosion of capital outlays with serious implications for expanding the productive capacity of the economy in the future. Expenditure on subsidies has remained impervious to fiscal adjustment, while spending on social infrastructure continues to remain low. Large gaps in disinvestment have intensified the fiscal stress. Reflecting these adverse developments, the debt-GDP ratio has been climbing since the second half of the 1990s and is expected to touch 77 per cent of GDP by the end of March 2004. Moreover, the monotonic rise in public debt has eroded the Government sector’s ability to generate savings and to service its internal debt. The 'quality' of the fiscal deficit has worsened, with the revenue deficit having increased substantially indicating that a larger share of borrowed fund is pre-empted by consumption expenditure. (Table 4.1).

Table 4.1: Indicators of Fiscal Policy

Items	2003-04	2002-03	2001-02	1995-96	1990-91
	(BE)	(RE)

1	2	3	4	5	6

(Per cent of GDP)

Quantitative Indicators
Gross Fiscal Deficit	9.2	10.1	9.9	6.5	9.4
Revenue Deficit	5.9	6.7	6.9	3.2	4.2
Primary Deficit	2.8	3.6	3.7	1.6	5.0
Qualitative Indicators
Revenue Receipts	19.0	19.1	17.4	18.3	18.6
Tax Revenue	15.1	14.9	13.7	14.7	15.4
Direct Taxes	4.3	4.2	3.6	3.5	2.5
Indirect Taxes	10.8	10.7	10.1	11.2	12.9
Total Expenditure	29.6	30.4	28.5	25.6	28.8
Developmental
Expenditure	14.6	15.4	14.3	13.9	17.4
Non-developmental	15.0	15.1	14.1	11.6	11.4
Expenditure
Interest Payments	6.4	6.5	6.2	5.0	4.4
Debt	76.9	75.5	71.1	58.0	61.7

(Per cent)

Capital Outlay/
Total Expenditure	11.2	9.6	9.0	10.7	13.1
Interest Payments/
Revenue Receipts	33.7	34.0	35.6	27.2	23.6
Revenue Deficit/
GFD	64.0	66.7	70.4	48.8	44.6

Note : All indicators are based on combined data of the Centre and States. For States, data are provisional for the years 2001-02 onwards.

CENTRAL GOVERNMENT FINANCES, 2002-03

Expenditure Management

4.3 Expenditure management strategies put in place by the Centre since the second half of the 1990s have begun to yield room for fiscal manoeuvre, notwithstanding the slippages in terms of deficit indicators in the recent years. Despite additional expenditure on account of drought relief and Plan allocations, cuts in non-Plan expenditure enabled a reduction in overall spending (as per revised estimates vis-à-vis budget estimates) by the Centre in 2002-03. The reduction in non-Plan expenditure was on account of lower defence spending, reduced interest payments due to softening in the interest rate on Government securities, lower outgo on pension as well as grants and loans to States and UTs due to non-utilisation of funds under the 'Fiscal Incentive Fund'. The expenditure on subsidies, however, increased significantly during 2002-03 reflecting the impact of dismantling of the Administered Price Mechanism (APM) for petroleum products as also the increase in food subsidy on account of drought conditions. Till the dismantling of the APM, subsidies on various petroleum products were absorbed in the oil pool account. With the discontinuance of the latter since 2002-03, the subsidies for domestic Liquefied Petroleum Gas (LPG), Public Distribution System (PDS) kerosene and freight for far flung areas now fall on the budget (Table 4.2).

Table 4.2 : Aggregate Expenditure of the Centre
(Rupees crore)

		2002-03		2002-03	2001-02	1995-96	1990-91	Variation between RE
		(RE)		(BE)				and BE (2002-03)
								Amount	Per cent

1		2		3	4	5	6	7	8

Total Expenditure		4,04,013		4,10,309	3,62,453	1,78,275	1,05,298	-6,296	-1.5
(1+2=3+4)		(16.3)		(16.0)	(15.8)	(15.0)	(18.5)
1.	Non-Plan Expenditure	2,89,924		2,96,809	2,61,259	1,31,901	76,933	-6,885	-2.3
	of which:	(11.7)		(11.6)	(11.4)	(11.1)	(13.5)
	Interest Payments	1,15,663		1,17,390	1,07,460	50,045	21,498	-1,727	-1.5
		(4.7)		(4.6)	(4.7)	(4.2)	(3.8)
	Defence	56,000		65,000	54,266	26,856	15,426	-9,000	-13.8
		(2.3)		(2.5)	(2.4)	(2.3)	(2.7)
	Subsidies	44,618		39,801	31,207	12,666	12,158	4,817	12.1
		(1.8)		(1.6)	(1.4)	(1.1)	(2.1)
2.	Plan Expenditure	1,14,089		1,13,500	1,01,194	46,374	28,365	589	0.5
		(4.6)		(4.4)	(4.4)	(3.9)	(5.0)
3.	Revenue Expenditure	3,41,648		3,40,482	3,01,611	1,39,861	73,516	1,166	0.3
		(13.8)		(13.3)	(13.1)	(11.8)	(12.9)
4.	Capital Expenditure@	62,365		69,827	60,842	38,414	31,782	-7,462	-10.7
		(2.5)		(2.7)	(2.6)	(3.2)	(5.6)

RE : Revised Estimates.			BE : Budget Estimates.
@ Includes capital outlays and loans and advances.
Note : Figures in brackets are per cent of GDP.

4.4 The gains in expenditure restraint, albeit limited, have strengthened the commitment to fiscal consolidation. They have prepared the ground for adequate forecasting and financial planning so as to ensure that the overall gains of fiscal prudence are also reflected in efficient intra-year cash management. Effective cash management helps in conserving scarce cash resources and ultimately, in controlling aggregate spending and the budgetary gap. In the context of Central Government finances, it is observed that the intra-year divergence between revenue flows and expenditure is high. There is also a tendency of bunching of expenditure during the latter part of the fiscal year (Chart IV.1).

4.5 The initiative to introduce cash management on a pilot basis in major spending Ministries in the 2003-04 budget needs to be seen as an important step forward towards effective expenditure management. The cross-country experience indicates that the time-sliced release of funds for spending and incentive-based cash management practices contribute to overall fiscal discipline (Box IV.1).

Box IV.1
Public Expenditure : Cash Management

Public expenditure management involves determination of the size of the budget, size of the outlays on different functions and the magnitude of outlays on various programmes within the resource constraints at various stages of government decision making. A core element of public expenditure management is cash management which involves conservation and optimisation of cash flow and a sensitivity to cash costs. Effective cash management involves (a) forecast of receipts, disbursements and the resulting cash balances within the governmental financial system on a high frequency basis; (b) strict control over cash inflows to minimise time lags between expected and actual receipts; (c) cash outflow control to prevent both late and premature payments; and (d) minimising operating cash balances.

Cross-country experience indicates that three types of practices for releasing funds are in existence. In countries where budgeted amounts are available soon after the budget is approved (few British Commonwealth countries and some economies in transition), a system of time-sliced releases is in existence. An alternative arrangement is one under which formal warrants are issued by the Ministry of Finance in response to requests from the spending agencies. Such requests have no defined periodicity and primarily reflect the changing seasonal requirements for outlays other than those on personnel. Under the third type of arrangement, fixed amounts are released for commitment and payment on either a monthly or a quarterly cycle.

All these arrangements regulate the release of cash rather than amounts of cash to be credited to spending agencies. Institutional arrangements for aggregate fiscal discipline can range from constitutional restraints on aggregate expenditure (e.g., Indonesia) through formal laws (e.g., Maastricht, New Zealand, Australia) to public commitments by the executives with or without the commitment of the legislature (e.g., U.S.). Incentive-based practices are followed in some countries like Sweden where the annual budget appropriations are deposited into each agency's interest-bearing account. Slow spending agencies get some interest earnings and the fast spenders have to pay interest. Also, to avoid the end-of-year spending surges, the agencies are allowed to carry forward their unused appropriations.

In the Indian context, public expenditure management has received focused attention as part of fiscal consolidation. An important institutional arrangement in this direction was the creation of the Expenditure Reform Commission to suggest measures to strengthen expenditure management. Following the recommendations of the Commission, the Government has taken several measures to contain expenditure growth and ensure efficiency in the expenditure management. The weak link in expenditure management, however, is cash management.

The pattern of expenditure reveals that for the last three years on an average, about 19 per cent of the total expenditure is incurred during the last month of the fiscal year. The pilot cash management system introduced in the Union Budget, 2003-04 adopts time-slicing of funds release to permit convergence of expenditure with the availability of resources within the year. Based on the actual requirement, monthly or quarterly cash limits for various ministries will be prescribed. The improved cash management is expected to avoid both mis-matches between receipts and expenditure and the rush of expenditure in the last quarter of the fiscal year.

References

De Zoysa, Hemma R. (1990), Cash Management, in A. Premchand (ed), Government Financial Management-Issues and Country Studies, IMF.
Premchand, A. (ed) (1990), Government Financial Management-Issues and Country Studies, IMF.
World Bank (1998), Public Expenditure Management Handbook. http://www1.worldbank.org/publicsector. handbooks.htm.

4.6 Subsidies have almost doubled in the last five years with a sharp increase in 2002-03. Food and fertiliser subsidies account for 87.4 per cent of the expansion in subsidy spending since 1990-91. Food subsidy, mainly financing the buffer carrying cost and producers' subsidy, has been rising pari passu with the accumulation of foodstocks. The fiscal impact of the increase in foodgrain stocks is visible in the unprecedented expansion in food subsidies since 2000-01. On the other hand, the rationalisation of the Retention Price Scheme and enhancement of the maximum retail price of fertilisers has had positive effects on fertiliser subsidies. The budget for 2001-02 announced a phased programme of complete decontrol of the urea prices by April 1, 2006. The impact of these measures is reflected in the decline in fertiliser subsidies in recent years. Moreover, the emergence of petroleum subsidy since 2002-03 is the result of the dismantling of APM for petroleum products. The total subsidies are, however, high at 1.6 per cent of GDP in 2002-03, even after excluding the subsidy on the petroleum products (Table 4.3).

Table 4.3 : Expenditure on Subsidies by Major Heads
(Rupees crore)

Year	Food	Fertiliser		Interest	Petroleum	Other	Total Subsidies

1	2	3		4	5	6	7

1990-91	2,450	4,389		379	0	4,940	12,158
	(0.4)	(0.8)		(0.1)	–	(0.9)	(2.1)
1991-92	2,850	5,185		316	0	3,902	12,253
	(0.4)	(0.8)		(0.1)	–	(0.6)	(1.9)
1992-93	2,800	6,136		113	0	1,775	10,824
	(0.4)	(0.8)		–	–	(0.2)	(1.4)
1993-94	5,537	5,079		113	0	876	11,605
	(0.6)	(0.6)		–	–	(0.1)	(1.4)
1994-95	5,100	5,769		76	0	909	11,854
	(0.5)	(0.6)		–	–	(0.1)	(1.2)
1995-96	5,377	6,735		34	0	520	12,666
	(0.5)	(0.6)		–	–	–	(1.1)
1996-97	6,066	7,578		1,222	0	633	15,499
	(0.4)	(0.6)		(0.1)	–	–	(1.1)
1997-98	7,900	9,918		78	0	644	18,540
	(0.5)	(0.7)		–	–	–	(1.2)
1998-99	9,100	11,596		1,434	0	1,463	23,593
	(0.5)	(0.7)		(0.1)	–	(0.1)	(1.4)
1999-2000	9,434	13,244		1,371	0	438	24,487
	(0.5)	(0.7)		(0.1)	–	–	(1.3)
2000-01	12,060	13,800		111	0	867	26,838
	(0.6)	(0.7)		–	–	–	(1.3)
2001-02	17,499	12,595		210	0	903	31,207
	(0.8)	(0.5)		–	–	–	(1.4)
2002-03(RE)	24,200	11,009		765	6,265	2,379	44,618
	(1.0)	(0.4)		–	(0.3)	(0.1)	(1.8)
2003-04(BE)	27,800	12,720		179	8,116	1,092	49,907
	(1.0)	(0.5)		–	(0.3)	–	(1.8)

RE : Revised Estimates.			BE : Budget Estimates.
Note: Figures in brackets are per cent of GDP.

4.7 As mentioned before, earlier efforts at fiscal correction have resulted in a persistent decline in capital expenditure. In general, it is capital outlays which have provided the soft option for deficit-based fiscal correction. In the revised estimates for 2002-03, capital outlays fell short of the budgetary target by more than 25 per cent, implying the diversion of resources from productive investments to current expenditures. In the Indian context, there is considerable evidence that public investment has played a preponderant role in entrenching the conditions for higher growth. Moreover, expanding capital outlay in infrastructure has distinct salutary effects in terms of crowding in private investment. Under these circumstances, compression of capital outlay would inevitably affect asset creation and development of the physical infrastructure which holds the key to accelerated growth (Table 4.4).

Table 4.4 : Capital Expenditure of the Centre
(Rupees crore)

	2002-03		2002-03	2001-02	1995-96	1990-91	Variation between RE
	(RE)		(BE)				and BE (2002-03)
							Amount	Per cent

1	2		3	4	5	6	7	8

Total Capital Expenditure	62,365		69,827	60,842	38,414	31,782	-7,462	-10.7
(1+2)=(3+4)	(2.5)		(2.7)	(2.6)	(3.2)	(5.6)
1. Capital Outlay	30,345		40,691	26,558	14,099	12,130	-10,346	-25.4
	(1.2)		(1.6)	(1.2)	((1.2)	(2.1)
2. Loans and Advances	32,020		29,136	34,284	24,316	19,652	2,884	9.9
	(1.3)		(1.1)	(1.5)	(2.0)	(3.5)
3. Non-Plan Capital	20,945		26,640	21,305	21,062	15,348	-5,695	-21.4
Expenditure	(0.8)		(1.0)	(0.9)	(1.8)	(2.7)
of which
Defence Capital	14,912		21,411	16,207	8,015	4,552	-6,499	-30.4
	(0.6)		(0.8)	(0.7)	(0.7)	(0.8)
4. Plan Capital Expenditure (i+ii)	41,420		43,187	39,537	17,353	15,745	-1,767	-4.1
	(1.7)		(1.7)	(1.7)	(1.5)	(2.8)
i) Central Plan Outlay	18,735		18,205	18,193	8,255	9,134	530	2.9
	(0.8)		(0.7)	(0.8)	(0.7)	(1.6)
ii) Central Assistance	22,685		24,982	21,344	9,098	6,611	-2,297	-9.2
for State and UT Plans	(0.9)		(1.0)	(0.9)	(0.8)	(1.2)

RE : Revised Estimates.		BE : Budget Estimates.
Note: Figures in brackets are per cent of GDP.

Revenue Position

4.8 Various components of revenue receipts were impacted differentially by underlying macroeconomic conditions. The gap in revenue receipts vis-a-vis initial expectations was due to the fall in collections of direct taxes - individual income tax and corporation tax - as well as the Union excise duties. Both Union excise duties and corporation tax collections were, however, significantly higher than that in the preceding year, benefiting from the revival of industrial activity and the significant improvement in the financial performance of manufacturing companies. Customs duties benefited from the surge in import demand and posted a modest increase relative to budget estimates (Table 4.5).

Table 4.5 : Total Receipts of the Centre
(Rupees crore)

	2002-03	2002-03		2001-02	1995-96	1990-91	Variation between RE
	(RE)	(BE)					and BE (2002-03)
							Amount	Per cent

1	2	3		4	5	6	7	8
Total Receipts	4,04,013	4,10,309		3,62,453	1,68,468	93,951	-6,296	-1.5
	(16.3)	(16.0)		(15.8)	(14.2)	(16.5)
Revenue Receipts	2,36,936	2,45,105		2,01,449	1,10,130	54,954	-8,169	-3.3
	(9.6)	(9.6)		(8.8)	(9.3)	(9.7)
Tax Revenue (Net)	1,64,177	1,72,965		1,33,662	81,939	42,978	-8,788	-5.1
	(6.6)	(6.8)		(5.8)	(6.9)	(7.6)
Non-Tax Revenue	72,759	72,140		67,787	28,191	11,976	619	0.9
	(2.9)	(2.8)		(3.0)	(2.4)	(2.1)
Capital Receipts	1,67,077	1,65,204		1,61,004	58,338	38,997	1,873	1.1
	(6.8)	(6.5)		(7.0)	(4.9)	(6.9)

Memo Items@

Corporation Tax	44,700	48,616		36,609	16,487	5,335	-3,916	-8.1
	(1.8)	(1.9)		(1.6)	(1.4)	(0.9)
Income Tax	37,300	42,524		32,004	15,592	5,371	-5,224	-12.3
	(1.5)	(1.7)		(1.4)	(1.3)	(0.9)
Customs Duty	45,500	45,193		40,268	35,757	20,644	307	0.7
	(1.8)	(1.8)		(1.8)	(3.0)	(3.6)
Union Excise Duty	87,383	91,433		72,555	40,187	24,514	-4,050	-4.4
	(3.5)	(3.6)		(3.2)	(3.4)	(4.3)

RE : Revised Estimates.			BE : Budget Estimates.
@ Memo items are on gross basis which include States’ share.
Note : Figures in brackets are per cent of GDP.

4.9 The tax-GDP ratio of the Centre has suffered steady deterioration from more than 10 per cent in late 1980s to just about 9 per cent in 2002-03, reflecting a decline in tax buoyancy¹. Over the Eighth and Ninth Plan periods, the buoyancy of Central taxes deteriorated from 0.9 to 0.8 mainly on account indirect taxes; although the buoyancy in direct tax collection was maintained at 1.3, it has stagnated recent years and has not compensated adequately the fall in buoyancy of indirect taxes. The restructuring of both direct and indirect taxes effected since 1991 92, coupled with the structural shift in the composition of GDP towards the less-taxed services sector, appears to have affected the growth in tax revenue (Table 4.6)

Table 4.6 : Gross Tax Revenue of the Centre
(Per cent of GDP)

Years	Major Taxes					Gross Tax
						Revenue
	Income	Corporation		Excise	Customs
	Tax	Tax		Duties	Duties

1	2	3		4	5	6

1990-91	0.9	0.9		4.3	3.6	10.1
1991-92	1.0	1.2		4.3	3.4	10.3
1992-93	1.1	1.2		4.1	3.2	10.0
1993-94	1.1	1.2		3.7	2.6	8.8
1994-95	1.2	1.4		3.7	2.6	9.1
1995-96	1.3	1.4		3.4	3.0	9.4
1996-97	1.3	1.4		3.3	3.1	9.4
1997-98	1.1	1.3		3.2	2.6	9.1
1998-99	1.2	1.4		3.1	2.3	8.3
1999-00	1.3	1.6		3.2	2.5	8.9
2000-01	1.5	1.7		3.3	2.3	9.0
2001-02	1.4	1.6		3.2	1.8	8.1
2002-03(RE)	1.5	1.8		3.5	1.8	9.0
2003-04(BE)	1.6	1.9		3.5	1.8	9.2

RE : Revised Estimates.			BE : Budget Estimates.

4.10 Non-tax revenue remained broadly unchanged at 3 per cent of GDP in 2002-03, unresponsive to the impulses of fiscal reforms However, the need for restructuring of public sector undertakings is critical, encompassing a thorough rationalisation of user charges and cost recoveries on the services rendered by the Government or entities in areas such as transport, power and irrigation. The Prime Minister's Economic Advisory Council (2002) had identified establishment rational user charges and credible regulatory authorities as the two critical features on which the success of infrastructure development will depend. The rationalisation of user charges covers utilities such as power, water and transport. User charges could be index-linked to input cost and a process of periodic revision should be automatic (Box IV.2).

Box IV.2
Pricing Policy for Public Services : The Dilemma of User Charges

The success of ensuring the critical physical infrastructure in the country depends on levying affordable and adequate user charges. In sectors like roads, telecommunications and ports where it has been possible to identify and levy proper user charges, overall growth has been noteworthy. Despite the well-known benefits of rationalising user charges to reflect true economic costs, progress in this direction has been impeded mainly by political economy considerations and the acute lack of the enabling legal architecture.

Taxation to cover the deficit is generally not favoured as an alternative to the raising of user charges. It is regarded as inequitable since everybody - not just the users of the public service - would be charged. Furthermore, while lump sum taxation to cover the deficit would not involve efficiency loss but it would be regressive. The Ramsey rule suggests that a mark-up (over the marginal cost) set in inverse proportion to the (compensated) price elasticity of demand for the product would minimise dead weight or efficiency loss.

Another solution to the policy dilemma is to charge a two-part tariff (a flat user fee which would be equivalent to a lump sum tax and hence would not involve any resource misallocation plus charge per unit of service) to those availing of the public service. Such techniques are used in the case of pricing of public utilities such as telephones, electricity and water supply.

Yet another technique is to apply price discrimination, wherein the consumer is charged a price equivalent to marginal cost at the last unit but higher prices for earlier units. Given the differences in the demand schedules of consumers, this would entail differential pricing as is evident in the case of electricity charges for residential and commercial groups.

In the case of public utility regulations, pricing is typically based on the principle of covering costs plus a fair return on capital, commensurate with that in respect of other industries. This is usually the case when public services are supplied in competition with private firms (which usually price the service above marginal cost). In accordance with the Theorem of the Second Best, setting price equivalent to marginal cost would be inefficient in other (public) sectors. In such cases, prices could be set equivalent to long-run average costs plus a normal return on capital. This would ensure fair competition and prevent high cost public producers from displacing more efficient low cost private producers.

Peak-load pricing involves charging higher user charges during periods of 'excess' demand and charging the marginal operating cost during off-peak periods (as was the case in respect of telephones in India). The same principle could be applied to address congestion on (toll) roads/bridges during peak hours. The pricing of negative externalities such as pollution is rendered much more difficult by the absence of adequate relevant information. Even so, efficient pricing involves adding the 'costs' of such externalities and setting the user charge equivalent to the marginal social cost.

In India, the need to raise user charges is underscored in the pricing of telecom services where it is seen as an essential ingredient of transition from a protected market to competition. As far as water pricing is concerned, a model based on capital, operation and maintenance costs has been attempted in some areas, although studies have shown that costs of water provision exceeded recovery in nearly 76 per cent of cities and towns in India. Cross-subsidisation of electricity charges in India has acted as a regressive tax on the commercial sector. Thus, electricity companies could recover only 68.6 per cent of their cost from the consumers. Proper pricing of power alone can reduce the financial burden of the state electricity boards and render them viable. As regards the railways, the fare freight ratio (earning per passenger Km. vis-a-vis earning per tonne Km.) continues to be one of the lowest in the world at 0.31 in 2001-02. Revenue losses of state road transport corporations were placed at around Rs.1,950 crore in 1999-2000.

Pricing and cost recovery policies have often not taken account of the fiscal effects and the cost of public funds. Setting user charges to economically efficient levels should, therefore, be the first priority for financing the economic infrastructure. Moreover, the user charges need to cover maintenance expenditures and control the level of services usage. Pricing policy should also address social concerns relating to public utilities and their long-term commercial viability.

References

Baumol, W. and D. Bradford (1970), 'Optimal Departures from Marginal Cost Pricing', American Economic Review, June, Vol. 60, 265-83.
McKinsey & Company (2001), India: The Growth Imperative, Vol. I, New Delhi.
Mathur, O.P. (2001), Coming to Grips with Issues of Pricing Urban Water and Intra-City Bus Transport, National Institute of Public Finance and Policy, New Delhi.

4.11 The disinvestment programme made some progress during 2001-02 with the strategic sale process of some public sector undertakings gaining momentum; nevertheless the actual proceeds were lower than the targeted amount. In 2002-03, the disinvestment process remained below expectations. A major challenge facing the programme of public sector restructuring has been the closing down of persistently loss making and non-viable public sector undertakings (PSUs) so that the profitability of the other public enterprises could be a major source of resource generation to provide budgetary support. The stage is set for reforms in the PSUs by restructuring of potentially viable PSUs and improving the profitability and efficiency of the viable units. Priorities in reforms include raising return on investments in PSUs and infusing professionalisation in management (Box IV.3).

Box IV.3
Disinvestment Strategies and PSU Reform

The terms, 'disinvestment' and 'privatisation', are usually used interchangeably all over the world. In actuality, while 'disinvestment' represents sale of government share holding in PSUs, 'privatisation' is a more comprehensive concept and implies denationalisation including transfer of management and control to private entities. Widespread privatisation of PSUs has been a common phenomenon in both developing and developed countries in recent years, particularly as a response to their inefficient functioning and their adverse impact on State budgets. More than 100 countries across the globe have privatised some of their state-owned enterprises.

In India, initiatives have been taken over the years to enhance the efficiency and profitability of PSUs. Early PSU reforms focused on the creation of a buffer in the form of a holding company in line with the recommendations of the Committee to Review Policy for Public Enterprises (Chairman: Arjun Sengupta, 1984). Subsequently, a system of Memorandam of Understanding (MoU), imparting clarity to PSU objectives, was put in place.

The disinvestment process in India has evolved over more than a decade. The Government of India's Interim Budget for 1991-92 contained the first explicit statement on divestiture - the proposal to divest up to 20 per cent of the Government equity in select PSUs in favour of public sector institutional investors. A Disinvestment Commission was set up in 1996 and it recommended a shift from public offerings to strategic/trade sales with transfer of management in respect of a number of PSUs. The Union Budget of 1999-2000 provided clear guidelines for the classification of PSUs as strategic (defence-related, atomic energy related, railway transport) or non-strategic. A Department of Disinvestment was constituted in 1999 as a nodal department to streamline and speed up the process of disinvestment. Since 2000-01, major policy statements on disinvestment included closing down of PSUs which could not be revived, disinvestment in all non-strategic PSUs up to 74 per cent or higher and protection of workers' interest through safety nets. The Union Budget 2002-03 announced the completion of strategic sales in seven PSUs and some government-owned hotels and indicated that the shift in approach to strategic sales of blocks of shares to strategic investors (instead of disinvestments of small lots of shares) had enhanced the price/earnings (P/E) ratios. The policy on disinvestment announced in December 2002 specifically focused, inter alia, on the modernisation and upgradation of PSUs, creation of new assets, generation of employment, retiring of public debt, setting up a Disinvestment Proceeds and avoiding the emergence of private monopolies consequent upon disinvestment. The Union Budget 2003 04 has viewed the disinvestment process as a means unlocking the productive potential of the PSUs and reorienting the Government away from business towards the business of governance.

Reforms in PSUs have varied across industries in India The reform process in the power sector has envisaged privatisation of distribution, segregation of concentrated zones of high load density, competitive market structure and multi-tier regulation. The process, however, remains far from complete. Liberalisation of the telecommunication sector is substantially complete with the enactment of National Telecom Policy 1994, setting up of the Telecom Regulatory Authority of India (TRAI) in 1997 and the Telecom Policy 1999 which has enabled the opening of almost all telecom services to the private sector. oil sector has also completed the first round disinvestment but the major stake is still with Government.

Out of 62 PSUs considered for disinvestment by Disinvestment Commission, the Central Government so far taken decisions to divest 49 PSUs. Out of 919 PSUs, the process of disinvestments/winding restructuring has been initiated for 221 units and process of privatisation has been completed for 33 units Realisation through disinvestment during 1991-stood at Rs.29,488 crore for the Centre as against a of Rs.78,300 crore, i.e., an achievement of about 38 cent of the target.

References

Government of India, Ministry of Disinvestment, Website
Lieberman, L. W. and D. Kirkness (eds) (1998), Privatisation and Emerging Equity Market Washington D.C., Flemings.
World Bank (1995), 'Bureaucrats in Business: Economics and Politics of Government Ownership', Policy Research Report.

Overall deficit

4.12 The revised estimates for 2002-03 posted moderate slippages in the key indicators of the budgetary gap as initial expectations of higher growth in revenue collections and enhanced realisation from disinvestments were belied (Table 4.7).

Table 4.7 : Deficit Indicators of the Centre
(Rupees crore)

	2002-03	2002-03	2001-02	1995-96	1990-91	Variation between RE
	(RE)	(BE)				and BE (2002-03)
						Amount	Per cent

1	2	3	4	5	6	7	8

Gross Fiscal Deficit	1,45,466	1,35,524	1,40,955	60,243	44,632	9,942	7.3
	(5.9)	(5.3)	(6.1)	(5.1)	(7.8)

Revenue Deficit	1,04,712	95,377	1,00,162	29,731	18,562	9,335	9.8
	(4.2)	(3.8)	(4.3)	(2.5)	(3.3)

Gross Primary Deficit	29,803	18,134	33,495	10,198	23,134	11,669	64.3
	(1.2)	(0.7)	(1.5)	(0.9)	(4.1)

RE : Revised Estimates.		BE : Budget Estimates.
Note: Figures in brackets are per cent of GDP.

4.13 The persistence of fiscal stress limits the manoeuverability in revenue and expenditure policy and thereby restricts the scope of fiscal policy as a counter-cyclical tool. The committed nature of the expenditure and rigidities in the revenue side impede fiscal discretion in the context of the downturn phase of the business cycle (Box IV.4).

Box IV.4
Fiscal Stress and the Counter-Cyclical Policy

Fiscal policy influences economic activity through the operation of built-in or automatic stabilisers or through discretionary fiscal policy measures. In the short-run, automatic stabilisers, both on the revenue (progressive taxation) and expenditure side (unemployment insurance programme), would come into operation, ensuring efficiency in the system. Thus, in times of economic slowdown, the ideal policy stance is to accommodate a higher fiscal deficit since any effort to achieve a balanced budget target would turn out to be pro-cyclical. The problem with automatic stabilisers is, however, the persistence of 'deficit bias' as observed in several European countries. These countries adopted an expansionary fiscal stance in the times of slowdown but failed to restrict the expenditure in phase of recovery. It is also a fact that automatic stabilisers are more relevant only in industrialised economies with respect to the response of revenues to cyclical fluctuation in output. In developing countries, discretionary fiscal policy embodied in expenditure policies ensures effective counter cyclical response in times of slowdown. The basic theoretical underpinnings of the role of discretionary fiscal policy in stabilising the economy lie in the Keynesian framework where the government expenditure help the recovery of economic activity through revival of aggregate demand and multiplier effects.

The emergence of the European Monetary Union (EMU) represents a milestone in the historical evolution of fiscal policy. Its 'Stability and Growth Pact' seeks to strengthen the way for automatic stabilisers and balanced or surplus budgets as they would avoid structural deficits and consequent accumulation of the public debt. Countries like US, Japan and France reinforced the automatic stabilisers through an easy stance of fiscal policy in the 1990s recession. The tight stance of discretionary fiscal policy in some of the countries in the European Union, in fact, delayed the recovery from the 1993 recession. Countries like UK, Sweden and France have eased fiscal policy during the recession and tightened later. They achieved success in stabilising the economy but at the cost of fiscal positions that were weak in 1999 with substantially high debt-to-GDP ratios. In the US, on the other hand, fiscal policy acted as a powerful complement to automatic fiscal stabilisation and the desired result of stabilisation was achieved with a better debt position.

The fiscal position in India is marked by the persistence of the deficit. The structure of Government expenditure is skewed towards non-productive sectors. Committed expenditure like interest payments and wages and salaries has risen, leaving little scope for the Government to direct resources towards developmental and productive channels. The sluggish trend in revenues as also the committed nature of expenditure has constrained the use of fiscal policy to counter the slowdown in the economy. Empirical studies have shown that the fiscal deficit in India is mainly of a structural type and the cyclical component is negligible. The presence of a large structural deficit implies less scope for relying on automatic stabilisers.

References

Buti, Marco; Hagen, Jurgen von and Matinez-Mongay, Carlos (2002). The Behaviour of Fiscal Authorities- Stabilisation, Growth and Institutions, Palgrave, New York.
Noord, Paul van den (2002). Automatic Stabilisers in the 1990s and Beyond in Buti, Hagen and Matinez-Mongay (2002).
Heller S. Peter (2002). Considering the IMF's Perspectives on a Sound Fiscal Policy, IMF Policy Discussion Paper, July.

STATE GOVERNMENT FINANCES, 2002-03

4.14 In recent years, the focus of fiscal reform has turned sub-national. It is increasingly recognised that it is the State finances where the government sector's interface with the people is most significant. Issues in the reform of fiscal policy in the States have a direct bearing on the quality of life.

4.15 The growth of revenue receipts of States during 2002-03 over the previous year was facilitated mainly by a rise in States' own taxes and grants from the Centre. Tax revenues were, however, affected by the slowing of activity in the wake of the drought. There were shortfalls in the States' own revenue receipts (tax and non tax revenue) as well as in States’ share in Central taxes in the revised estimates vis-a-vis budget estimates. In the States’ own taxes, the decline was mainly on account of sales tax collection; both States’ property taxes and income taxes exceeded the budget estimates. Under States’ non-tax revenue, receipts from State lotteries and interest receipts were lower in the revised estimates, while dividend and profits exceeded the budget estimates. Capital receipts of the States were higher on account of a rise in market borrowings and special securities issued to the National Small Saving Fund (Table 4.8).

Table 4.8 : Total Receipts of States
(Rupees crore)

			2002-03	2002-03		2001-02	1995-96	1990-91	Variation between RE
			(RE)	(BE)					and BE (2002-03)
									Amount	Per cent

1			2	3		4	5	6	7	8

Total Receipts (1+2)			4,37,292	4,25,655		3,80,106	1,80,433	91,160	11,637	2.7
			(17.7)	(16.6)		(16.6)	(15.2)	(16.0)
1. Revenue Receipts (a+b)			2,93,873	3,06,844		2,55,599	1,36,803	66,467	-12,971	-4.2
			(11.9)	(12.0)		(11.1)	(11.5)	(11.7)
a)	Tax Revenue		2,02,518	2,15,049		1,80,275	92,913	44,586	-12,531	-5.8
			(8.2)	(8.4)		(7.9)	(7.8)	(7.8)
	States Taxes		1,49,358	1,52,590		1,31,710	63,865	30,344	-3,232	-2.1
			( 6.0)	(6.0)		( 5.7)	(5.4)	( 5.3)
	Sharable Taxes		53,160	62,459		48,565	29,048	14,242	-9,299	-14.9
			(2.2)	(2.4)		(2.1)	(2.4)	(2.5)
b)	Non-Tax Revenue		91,355	91,795		75,324	43,891	21,881	-440	-0.5
			(3.7)	(3.7)		(3.3)	(3.7)	(3.8)
	Grants		55,401	54,008		43,048	20,996	12,643	1,393	2.6
			(2.2)	(2.2)		(1.9)	(1.8)	( 2.2)
	States Own Non-Taxes		35,954	37,787		32,276	22,895	9,238	-1,833	-4.9
			(1.5)	(1.5)		(1.4)	(1.9)	(1.6)
2. Capital Receipts			1,43,419	1,18,811		1,24,507	43,630	24,693	24,608	20.7
			(5.8)	(4.6)		(5.4)	(3.7)	(4.3)

RE : Revised Estimates.					BE : Budget Estimates.
Note:		Figures in brackets are per cent of GDP.
Source :		Budget Documents of State Governments.

4.16 Total expenditure in the revised estimates exceeded budget projections in 2002-03 on account of higher capital expenditure which rose to constitute one fifth of total expenditure of States. The increase in capital expenditure was mainly due to increases in the repayment of loans to the Centre and financial institutions reflecting the retirement of high cost debt owed to the Centre under the debt-swap scheme. Capital outlay in the revised estimates for 2002-03, however, fell short of budget estimates (Table 4.9).

Table 4.9 : Total Expenditure of the States
(Rupees crore)

			2002-03		2002-03	2001-02	1995-96	1990-91	Variation between RE
			(RE)		(BE)				and BE (2002-03)
									Amount	Per cent

1			2		3	4	5	6	7	8

Total Expenditure (1+2)			4,42,609		4,30,842	3,77,555	1,77,584	91,088	11,767	2.7
			(17.9)		(16.8)	(16.4)	(14.9)	(16.0)

1.	Revenue Expenditure		3,55,175		3,55,159	3,14,833	1,45,004	71,776	16	0.0
	of which		(14.4)		(13.9)	(13.7)	(12.2)	(12.6)

	Social Services		1,19,039		1,20,698	1,07,655	53,607	27,962	-1,659	-1.4
			(4.8)		(4.7)	(4.7)	(4.5)	(4.9)

	Economic Services		72,803		70,409	65,889	35,669	20,892	2,394	3.4
			(2.9)		(2.8)	(2.9)	(3.0)	(3.7)

2.	Capital Expenditure		87,434		75,683	62,722	32,580	19,312	11,751	15.5
	of Which		(3.5)		(3.0)	(2.7)	(2.7)	(3.4)

	Capital Outlay		41,600		43,619	32,206	18,495	9,223	-2,019	-4.6
			(1.7)		(1.7)	(1.4)	(1.6)	(1.6)

RE : Revised Estimates.				BE : Budget Estimates.
Note :		Figures in brackets are per cent of GDP.
Source :		Budget Documents of State Governments.

4.17 The revised estimates for 2002-03 indicate deviations in all major deficit indicators of State finances, with significant slippages in the revenue deficit as well as the primary deficit. Gross fiscal deficit was also higher in the revised estimate as compared with the budget estimates (Table 4.10).

Table 4.10 : Major Deficit Indicators of State Governments
(Rupees crore)

	2002-03	2002-03		2001-02	1995-96	1990-91	Variation between RE
	(RE)	(BE)					and BE (2002-03)
							Amount	Per cent

1	2	3		4	5	6	7	8

Gross Fiscal Deficit	1,16,730	1,02,882		95,986	31,426	18,787	13,848	13.5
	(4.7)	(4.0)		(4.2)	(2.6)	(3.3)

Revenue Deficit	61,302	48,314		59,233	8,201	5,309	12,988	26.9
	(2.5)	(1.9)		(2.6)	(0.7)	(0.9)

Primary Deficit	42,584	30,629		33,497	9,494	10,132	11,955	39.0
	(1.7)	(1.2)		(1.5)	(0.8)	(1.8)

RE : Revised Estimates.			BE : Budget Estimates.
Note : Figures in brackets are per cent of GDP.
Source: Budget Documents of State Governments.

4.18 A key issue in redrawing of boundaries between the public and the private sectors from the societal point of view is the physical and social infrastructure which provides the wherewithal for a durable improvement in standards of livelihood and significantly impacts the health of the State finances. In this regard, power sector reforms have assumed critical importance in recent years. The States of Andhra Pradesh, Delhi, Haryana, Karnataka, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and Uttaranchal have enacted State Electricity Reform Acts providing, inter alia, for unbundling/ corporatisation of State Electricity Boards (SEBs). Twenty one States have either constituted or notified the constitution of State Electricity Regulatory Commission (SERC). Twenty five States have signed tripartite agreements envisaged under the scheme for one-time settlement of outstanding dues payable by the SEBs to the Central Public Sector Undertakings (Box IV.5)

Box IV.5
Issues in Sub-National Fiscal Reforms

Fiscal reform at the State level has assumed critical importance in recent years and there is a heightened sensitivity all around, displayed in conscious policy decisions. In this context, it is important to take note of certain constraints faced by the States in achieving their fiscal goals. A large proportion of expenditure is of a committed nature. Declining buoyancies in tax and non-tax receipts, competitive sales taxes and related concessions have affected their financial position. Internal resource mobilisation by the States has been further constrained by losses incurred by the State Public Sector Undertakings, especially electricity boards and transport undertakings.

Many States have initiated measures such as setting up of consolidated sinking fund, guarantee redemption fund, statutory and administrative limits on guarantees. Other important initiatives relate to the preparatory work for introduction of Value Added Tax (VAT) and rationalisation of user charges mainly relating to power, water and transport. On the expenditure front, a number of States have proposed containment of revenue expenditure through restrictions on fresh recruitment/creation of new posts and curbs on the increase in administrative expenditure. Some States have proposed introduction of a contributory pension scheme for newly recruited staff. Some States have initiated measures to provide statutory backing to fiscal reforms through enabling legislation.

In recent years, States have initiated measures pertaining to PSU reforms. Maharashtra has constituted a Board for restructuring State PSUs, while States such as Punjab and Tamil Nadu have initiated measures for constituting disinvestment commissions. In regard to power sector reforms, measures taken by the States relate to the constitution of State Electricity Regulatory Commissions (SERCs) for determining the tariff structure, unbundling of electricity boards into separate entities for power generation, transmission and distribution, increasing power tariffs, measures for reducing transmission and distribution losses.

The Centre has also initiated measures to encourage fiscal reforms at the State level. Guided by the recommendations of the Eleventh Finance Commission, the Central Government has set up an Incentive Fund for encouraging fiscal reforms in the States on the basis of a monitorable fiscal reform programme. Under this scheme, the States draw up a Medium-Term Fiscal Reforms Programme (MTFRP) aimed at bringing down the fiscal deficit to sustainable levels. The Union Budget, 2002-03 made provision for reform-linked assistance of Rs.12,300 crore for States under various schemes such as Accelerated Power Development and Reform Programme (APDRP), Accelerated Irrigation Benefit Programme (AIBP), Urban Reforms Incentive Fund (URIF), and Rural Infrastructure Development Fund (RIDF). In addition, a lump sum amount of Rs.2,500 crore was proposed for implementing policy reforms in sectors which are constraining growth and development.

COMBINED BUDGETARY POSITION OF THE CENTRE AND STATES

4.19 The combined revenue receipts of the Centre and States recorded a shortfall from the budgeted level. The rise in non-tax revenue, albeit marginal, was inadequate to compensate the shortfall in tax collections. The combined capital receipts increased in the revised estimates partly due to additional market borrowings by the States under the debt swap scheme to prepay the high cost debt to the Centre. The combined aggregate expenditure exceeded the budget estimates on account of higher than anticipated revenue expenditure and loans and advances, while capital outlay (capital expenditure net of loans and advances) registered a decline. Developmental expenditure rose mainly on account of increased spending in the social sector. On the other hand, non-development expenditure (excluding others) was lower than the budgeted level due to reduction in interest payments and non-developmental capital outlay. The revised estimates for 2002-03 place all the major deficit indicators of the combined Government sector (Centre and States) higher than their budgeted levels (Table 4.11).

Table 4.11 : Indicators of Combined Finances of Centre and States*
(Rupees crore)

						2002-03	2002-03	2001-02	1995-96	1990-91	Variation between RE
						(RE)	(BE)				and BE (2002-03)
Items											Amount	Per cent

Centre						1,45,466	1,35,524	1,40,955	60,243	44,632	9,942	7.3
						(5.9)	(5.3)	(6.1)	(5.1)	(7.8)
Gross Fiscal Deficit					States	1,16,730	1,02,882	95,986	31,426	18,787	13,848	13.5
						(4.7)	(4.0)	(4.2)	(2.6)	(3.3)
					Combined	2,48,979	2,26,864	2,26,418	77,671	53,580	22,115	9.7
						(10.1)	(8.9)	(9.9)	(6.5)	(9.4)

					Centre	1,04,712	95,377	1,00,162	29,731	18,562	9,335	9.8
						(4.2)	(3.7)	(4.4)	(2.5)	(3.3)
Revenue Deficit					States	61,302	48,314	59,233	8,201	5309	12,988	26.9
						(2.5)	(1.9)	(2.6)	(0.7)	(0.9)
					Combined	1,66,014	1,43,691	1,59,395	37,932	23,871	22,323	15.5
						(6.7)	(5.6)	(6.9)	(3.2)	(4.2)

					Centre	29,803	18,134	33,495	10,198	23,134	11,669	64.3
						(1.2)	(0.7)	(1.5)	(0.9)	(4.1)
Primary Deficit					States	42,584	30,629	33,497	9,494	10,132	11,955	39.0
						(1.7)	(1.2)	(1.5)	(0.8)	(1.8)
					Combined	88,492	64,442	84,048	18,598	28,585	24,050	37.3
						(3.6)	(2.5)	(3.7)	(1.6)	(5.0)

Total Receipts (A+B)						7,46,601	7,36,538	6,55,907	2,96,629	1,52,398	10,063	1.4

A. Revenue Receipts (1+2)						4,71,600	4,90,665	4,00,229	2,17,527	1,05,757	-19,065	-3.9

1.	Tax Receipts (a+b)					3,66,696	3,88,015	3,13,937	1,74,852	87,564	-21,319	-5.5

	a)	Direct Taxes				1,03,858	1,15,211	83,466	41,603	14,267	-11,353	-9.9

	b)	Indirect Taxes				2,62,838	2,72,804	2,30,471	1,33,248	73,297	-9,966	-3.7

2.	Non-Tax Receipts					1,04,904	1,02,650	86,292	42,675	18,193	2,254	2.2

B. Capital Receipts (a+b)						2,75,001	2,45,873	2,55,678	79,102	46,641	29,128	11.8

	a. Non-Debt Capital Receipts					14,657	19,726	18,158	6,968	3,233	-5,069	-25.7

	b. Debt Capital Receipts					2,60,344	2,26,147	2,37,520	72,134	43,408	34,197	15.1

Aggregate Expenditure (4+5)						7,51,917	7,41,724	6,53,354	3,03,586	1,63,673	10,193	1.4

1. Revenue Expenditure						6,37,614	6,34,357	5,59,624	2,55,457	1,29,628	3,257	0.5

2. Capital Outlay						71,945	84,310	58,763	32,594	21,370	-12,365	-14.7

3. Loans and Advances						25,678	18,589	26,417	14,115	11,589	7,089	38.1

4. Development Expenditure						3,79,589	3,72,374	3,29,007	1,65,361	98,686	7,215	1.9

5. Non-Development Expenditure						3,72,329	3,69,350	3,24,348	1,38,225	64,987	2,979	0.8
(Including others)

RE : Revised Estimates.						BE : Budget Estimates.
* For States, data are provisional for the year 2001-02 onwards.
Notes :.			1	Figures in brackets are per cent of GDP.
			2.	Combined GFD is the GFD of the Central Government plus GFD of the State Governments minus net lending from the Central Government to States.
			3.	Revenue deficit is the difference between revenue receipts and revenue expenditure adjusted for inter- Governmental transactions in the revenue account.
			4.	Gross primary deficit is defined as combined GFD minus combined interest payments.