RBI Bulletin

Finances of State Governments – 2011-12: Highlights*

The consolidated fiscal position of the States/Union Territories is budgeted to improve in 2011-12 with a return to surplus in the revenue account, reduction in fiscal deficit-GDP ratio and declining trend in debt-GDP ratio. This trend is poised to continue with majority of the States amending their Fiscal Responsibility and Budget Management Acts which map out graduated reductions in fiscal deficit and debt relative to their GSDPs over the medium-term. An analysis of the Reserve Bank’s contribution to finances of States over the years shows that, apart from being a banker and debt manager of the States, the Reserve Bank has progressively played a greater role since the 1990s as reflected in the formulation of Model Fiscal Responsibility Legislations for the States and advisory role in respect of fiscal sustainability issues from time to time. As the States return to rule-based fiscal consolidation, they need to deal with structural rigidities in their finances, focus on qualitative aspects of the fiscal consolidation process, undertake effective expenditure management and address issues relating to State Power Utilities keeping in view their impact on State finances.

This article presents the highlights of the State Governments’ budgets for 2011-12. A detailed analysis is presented in ‘State Finances: A Study of Budgets of 2011-12’ that was released in March 2012¹.

Presented against the backdrop of better economic growth performance in 2010-11, the State budgets for 2011-12 indicated the intent of the State governments to continue their progressive exit from the expansionary fiscal policy of the crisis years (2008-09 and 2009-10). The focus was more on expenditure control measures against the backdrop of the rollback of fiscal stimulus measures and the tapering off of the impact of the Sixth Pay Commission Award. All States, with the exception of Goa, have amended their Fiscal Responsibility and Budget Management (FRBM) Acts/Rules. Under the amended Acts, the State governments are aiming to eliminate revenue deficits and to bring about gradual reductions in fiscal deficit and debt levels latest by 2014-15, as was recommended by the Thirteenth Finance Commission (ThFC). While this augurs well for medium-term fiscal sustainability of the States, the eventual fiscal outcome would be shaped not only by the macroeconomic conditions but also by the joint commitment of the Centre and the States to implement fiscal reforms in the pipeline.

The issues and perspectives are presented hereunder followed by the policy initiatives of State Governments, the Government of India, and of the Reserve Bank of India. An analysis and assessment of the consolidated budgetary position of the State Governments for the year 2009-10 (Accounts), 2010-11 (Revised Estimates) and 2011-12 (Budget Estimates) is presented followed by a brief on outstanding liabilities and Market Borrowings of State Governments. As a special theme, a brief on the ‘Role of the Reserve Bank in State Finances’ is provided at the end.

Issues and Perspectives

As the second phase of rule-based fiscal consolidation has commenced for the States from 2011-12, the underlying emphasis should not only be on reverting to a sustainable fiscal path but also in drawing lessons from the past and developing new perspectives to address the key challenges. In particular, there is a need to address the structural rigidities, especially for the States which had missed out in the first phase of implementation of rule-based fiscal discipline. Greater fiscal transparency is also critical for monitoring the quality, durability and effectiveness of fiscal correction at the State level. The efficiency of expenditure management systems for the public sector as a whole needs to be improved for achieving desired outcomes. The proposed rationalisation of centrally sponsored schemes is expected to enable States to make efficient use of funds at the State government level and ensure adequate financial participation of the States in these schemes. From the perspective of fiscal stability, deterioration in the financial position of State Power Utilities (SPUs) may require a careful assessment of its potential impact on State finances. With increasing recourse to public-private partnerships mode for project financing, State governments need to recognise both explicit and implicit contingent liabilities arising on account of their participation in PPP schemes. Against the backdrop of an uncertain global economic environment, prudent management of interest rate and exchange rate risks associated with external loans (on back-to-back basis) also poses a new challenge.

Policy Initiatives

The policy initiatives and schemes proposed by the State governments, the Government of India and the Reserve Bank of India during 2011-12, which impinge on State finances are summarised as under.

State Governments

The broad thrust of policy proposals announced in State budgets for 2011-12 has been to carry forward the fiscal consolidation process which was re-started in 2010-11, in line with the recommendation of the ThFC.

On the revenue side, the focus has been more on tax enhancing measures while measures such as exemption/reduction in value added tax (VAT) rates on food and petroleum products and excise duties on petroleum products have also been announced to tackle the situation of price rise in essential commodities. On the expenditure side, besides increasing expenditure on food security and strengthening the public distribution system, States have proposed higher allocations for various Plan schemes (Centrally sponsored schemes and State plan schemes), particularly those relating to education, health, transportation, housing and employment generation.

In social sector, several measures have been proposed in the State budgets for 2011-12 to promote education, health, housing, social security, women empowerment, and welfare of SCs and STs. Emphasis has also been placed on improving infrastructure for the delivery of public goods like education and health services.The strengthening of social security measures such as scholarships for students, old age pensions, and insurance for vulnerable groups has also been announced in some of the State budgets. Development of infrastructure and other services through public private partnerships (PPP) has been another priority area in terms of policy initiatives of the States in 2011- 12. While expenditures aimed at increasing investments would work towards improving the growth climate, there is scope for controlling the tendency of several States to undertake populist measures that provide short-term assistance to various segments of the population, but in that process impose fiscal burden on the States. In addition to tax exemptions/reduction in taxes on food items to contain the rising food prices, State Governments have also continued to allocate higher resources towards bringing about an improvement in agricultural production.

Almost all major States have announced measures to enhance irrigation potential with a view to increase agricultural productivity. State governments have also announced certain sector-specific policy initiatives to promote industrial growth and industrialisation. A large number of States are taking up construction of roads and bridges and facilitating power generation, both of which are important inputs for industrial development.

The institutional measures adopted by the State governments such as Fiscal Responsibility and Budget Management (FRBM) Acts, Value Added Tax (VAT), New Pension Schemes (NPS), and setting up of Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF) have helped them to consolidate their finances in the last decade. The ThFC had worked out a fiscal consolidation roadmap for the States requiring them to eliminate their revenue deficit and achieve a fiscal deficit of 3 per cent of their respective GSDP, latest by 2014-15. It had also recommended a combined States’ debt-GDP target of 24.3 per cent to be reached during this period. The States were required to amend or enact their FRBM Acts to conform to these recommendations. Accordingly, all states, barring Goa, have amended their FRBM Acts/Rules, setting out annual deficit/debt targets in line with the ThFC recommendations. The FRBM Acts are expected to contribute to further improvement in the State finances, provided the macroeconomic scenario remains favourable.

Government of India

The Constitution Amendment Bill for goods and services tax (GST) was introduced in March 2011. The drafting of model legislation for Centre and State GST in concert with the States is under progress. The Centre has made significant progress on the GST Network (GSTN), which will be set-up as a National Information Utility (NIU) to build the necessary IT infrastructure for the introduction of GST. The key business processes of registration, returns and payments are in advanced stages of finalisation. The National Securities Depository Limited (NSDL) has been selected as the technology partner for incubating the NIU that will establish and operate the IT backbone for GST.

Reserve Bank of India

Pursuant to the signing of the agreement between the Government of Jammu and Kashmir and the Reserve Bank of India, an arrangement for cash management was put in place from April 1, 2011. The Ways and Means Advances (WMA) limit for the States including Jammu and Kashmir and the Union Territory of Puducherry was placed at ` 102.40 billion for the financial year 2011-12. The rates of interest on Normal and Special WMA and OD continued to be linked to the repo rate.

Consolidated Fiscal Position of State Governments

Accounts: 2009-10

The fiscal position of the States in terms of key deficit indicators had deteriorated during 2009-10 over the previous year, leading to the re-surfacing of revenue deficit after a gap of three years. A sharp increase in committed expenditure on account of pay/pension revisions and arrear payments under the Sixth Pay Commission Award had primarily contributed to the fiscal expansion. The extent of fiscal deterioration, however, turned out to be much less and the fiscal outcome of the States at the consolidated level showed marked improvement when the revised estimates for 2009-10 translated into accounts. Lower-than anticipated revenue expenditure more than offset the shortfall in revenue receipts, resulting in a 0.2 percentage point reduction in the consolidated revenue deficit to GDP ratio in 2009-10 vis-à-vis the revised estimates for the year.

The lower-than-anticipated revenue deficit together with a decline in capital outlay resulted in a reduction of 0.4 percentage point in the gross fiscal deficit (GFD)-GDP ratio in 2009-10 (Accounts) over the revised estimates. Consequently, the primary deficit of the States was also contained in 2009-10 (Accounts) as compared with 2009-10(RE) (Table 1 and Appendix Table 1).

Revised Estimates: 2010-11

The strengthening of the growth momentum in 2010-11 boosted revenues and improved the consolidated fiscal position of the States, as evident from the reduction in the key deficit-GDP ratios over the previous year. The growth in revenue receipts in 2010-11(RE) over 2009-10 (Accounts) more than offset the increase in revenue expenditure, which, together with a sharp increase in GDP, resulted in a narrowing of the revenue deficit-GDP (RD-GDP) ratio by 0.2 percentage point over the preceding year. The RD-GDP ratio in 2010-11(RE), however, remained unchanged over the budget estimates for the year. The GFD-GDP ratio in 2010-11(RE) was higher by 0.1 percentage point over the budget estimates, mainly on account of an increase in capital outlay.

Revenue receipts in 2010-11(RE) were higher than the budget estimates for the year due to higher States’ own tax revenue (OTR) as well as Central transfers to States. States’ OTR in 2010-11(RE) exceeded the budgeted levels, following higher collections from sales tax, stamp and registration fees, taxes and duties on electricity, state excise and taxes on vehicles. States also benefited from increased buoyancy in the Centre’s gross tax revenues and enhancement in the States’ share in shareable central taxes in accordance with the ThFC’s recommendation. Non-tax revenue of the States was higher in 2010-11(RE) reflecting higher grants from the Centre (Table 2 and Appendix Table 4). The States’ own non-tax revenue (ONTR) was, however, lower, mainly on account of lower receipts from ‘state lotteries’, ‘urban development’, and ‘dividends of State Public Sector Undertakings (PSUs)’.

Revenue expenditures in the revised estimates of 2010-11 were higher than the budget estimates, attributable to higher development expenditure, with social services contributing to over 52 per cent of the increase in total revenue expenditure. ‘Education, sports, art and culture’ and ‘relief on account of natural calamities’ were the major contributors to the increase in expenditure on social services. The increase in expenditure on economic services was led by ‘power’ and ‘transportation and communications.’ Nondevelopment revenue expenditure was also higher in 2010-11(RE) than the budget estimates on account of higher pension outgo, which more than offset the decline in expenditure on administrative services and interest payments.

GFD at the consolidated level was higher in 2010- 11(RE) than in 2010-11(BE) due to higher than the budgeted capital outlay, particularly in ‘energy’ and ‘transportation’; higher ‘net lending of the States’; and lower realisation of disinvestment proceeds than the budgeted level.

Budget Estimates: 2011-12

The consolidated revenue account of the States is budgeted to record a surplus in 2011-12, indicative of the return to the fiscal consolidation path as envisaged by the ThFC. The improvement in the revenue account is expected to provide the necessary resources for increased capital outlay while also contributing to a reduction in the GFD-GDP ratio by 0.5 percentage point in 2011-12(BE) over 2010-11(RE). In line with the budgeted decline in the GFD-GDP ratio, there is a reduction of 0.4 percentage point in the budgeted primary deficit, which bodes well for the long-run sustainability of State finances.

The consolidated States’ OTR as well as tax devolution from the Centre are, however, budgeted to decelerate during 2011-12 from their high growth rates of the previous year. Growth in non-tax revenue is also budgeted to decelerate in 2011-12 as compared with 2010-11(RE), primarily on account of a significant moderation in the growth of grants from the Centre. Barring receipts from the transport sub-sector, all other components of ONTR of the States are budgeted to grow at a slower pace in 2011-12 than the previous year.

Revenue receipts-GDP ratio is budgeted to remain unchanged in 2011-12 despite a marginal increase in the ratio of tax devolution from the Centre to GDP. On the non-tax revenue front, while States’ ONTR-GDP ratio is budgeted to marginally decline due to fall in interest receipts, the ratio of grants from the Centre to GDP is expected to remain stable at the previous year’s level. Among the non-tax resources of the States, the cost recovery of public services has been an important area of concern. While the cost recovery of services has improved over the years, it is budgeted to decline in 2011-12 for all important social and economic services, with the exception of the road sector.

The growth in consolidated revenue expenditure of the States is budgeted to decelerate substantially in 2011-12 as compared with 2010-11(RE), on account of deceleration in both development and non-development revenue expenditures. Within development revenue expenditure, social services are budgeted to record a sharper deceleration than economic services. Non development expenditure growth is budgeted to decelerate in 2011-12 under all major categories, barring economic services. Interest payments, which account for over one-third of the non-development revenue expenditure of the States, are budgeted to record a lower growth in 2011-12. Committed expenditure as a ratio of revenue receipts is, therefore, expected to decline to 31.5 per cent in 2011-12 (BE) from 32.4 per cent in 2010-11(RE).

Capital expenditure is budgeted to grow at a faster rate in 2011-12 mainly due to accelerated growth in capital outlay. Within development capital outlay, the growth in ‘medical and public health’ under social services and ‘major and medium irrigation’ under economic services are budgeted to increase at a faster rate than in 2010-11 (RE). Loans and advances by the States are budgeted to grow at a higher rate in 2011-12 (BE) than in 2010-11 (RE) mainly on account of a sharp increase in loans for social services.

The pattern of aggregate expenditure of the States in 2011-12 (BE) shows a marginal decrease in the share of development expenditure in total expenditure. This is attributable to a decline in the share of the revenue expenditure component, particularly in ‘relief on account of natural calamities’ under social services, and ‘power’ under economic services. The share of development capital outlay in total expenditure is, however, expected to increase in 2011-12 (BE) by 0.7 percentage point mainly on account of a sharp increase in the share of ‘major and medium irrigation and flood control’ under economic services.

Social sector expenditure by the States, which had declined both as a proportion of total expenditure as well as GDP during the fiscal consolidation phase, particularly in the initial years, has shown substantial improvement since 2008-09 on account of the renewed focus in this area, which constitutes one of the primary responsibilities of the States. Within social services, the shares of ‘education, sports, art and culture’, ‘urban development’, ‘welfare of SCs, STs and OBCs’, and ‘social security and welfare’ are expected to increase in 2011-12(BE) as compared with those in 2010-11(RE) (Appendix Table 5). It may be noted that apart from increased allocations, an improvement in efficiency and delivery of services is required to achieve the desired outcomes in the area of social services.

As the consolidated revenue account position of States is expected to revert to a surplus position in 2011-12 (BE) after a gap of two years, the decomposition of the consolidated GFD of the States has undergone a change. The surpluses in the revenue account have reduced borrowing requirements for meeting the expenditure on capital outlay and net lending. The share of non-debt capital receipts in GFD is expected to increase by 0.5 percentage point in 2011-12 (BE) over 2010-11(RE), mainly on account of the sale of land by a State (Karnataka) (Table 3 and Statement 1).

Market borrowings would continue to remain the major source of financing of the GFD of the States. Its share in GFD financing, which had declined in 2010- 11(RE), is expected to increase sharply in 2011-12 on account of a decrease in the share of securities issued to the NSSF following an anticipated decline in small savings collections. As the revised estimates for 2010-11 show a significant drawdown of cash balances/cash investment accounts of the States to finance their GFD, a modest build up in the cash balances is budgeted for 2011-12, resulting in a negative contribution to GFD (Appendix Table 2 and 7). The share of loans from the Centre is expected to rise more than two-folds during 2011-12 (BE), although it will continue to remain a minor contributor in GFD financing.

Outstanding Liabilities and Market Borrowings of State Governments

The ThFC incentivised the States to amend their FRBM Acts and also recommended a path for the States to reduce their debt-GSDP ratios. Accordingly, States have amended FRBM Acts which, inter alia, set out their respective stipulated paths of graduated reductions in debt-GSDP ratios. The State governments have placed limits on the levels of debt-GSDP ratio to be achieved within a stipulated time frame, viz., by end-March 2015, recognising the adverse implications of high level of debt on future interest payments. Earlier, the debt relief mechanism prescribed by the Twelfth Finance Commission (TwFC) had helped States to contain the magnitude of outstanding liabilities by linking it to the adherence to rule-based fiscal consolidation (Statement 2).

As a result, the outstanding debt-GDP ratio could be contained at 25.5 per cent, i.e., much below the target of 30.8 per cent recommended by the TwFC for 2009-10. Not withstanding an increase in the outstanding level of debt of the States during 2010-11, the debt-GDP ratio continued to decline, reflecting the higher growth in nominal GDP. The consolidated debt-GDP ratio is budgeted to decline further to 22.5 per cent by end- March 2012, much below the recommended target (26.1 per cent) of the ThFC.

The continued emphasis on market borrowings to finance the gross fiscal deficit of State governments is reflected in the shift in the composition of States’ outstanding liabilities. While the share of market loans in the outstanding liabilities of State governments has increased gradually, the share of loans and advances from the Centre declined sharply from 1999-2000 onwards, with the change in accounting of loans against small savings². Market loans have been occupying the largest share in outstanding liabilities since end-March 2010.

The share of market loans in outstanding liabilities is expected to increase further to 37.1 per cent by end- March 2012. The share of securities issued to National Small Saving Fund (NSSF) in outstanding liabilities, which had remained the largest up to 2006-07, has declined persistently since end-March 2008 and is expected to be around 26 per cent by end-March 2012 (Appendix Table 8).

The share of public account items such as ‘State provident fund’, ‘reserve funds’ and ‘deposits and advances’ in total outstanding liabilities of the States has remained in the range of 25.3-26.9 per cent since 2005-06. Considering the burden arising from the high effective rate of interest on loans from Centre taken by States, the TwFC had recommended the Debt Consolidation and Relief Facility (DCRF) for its award period 2005-2010 on loans from centre, with the precondition that States enact their FRBMs. Although the DCRF came to an end on March 31, 2010, the exercise to assess States’ eligibility for debt waiver, based on their fiscal performance for the years 2008-09 and 2009-10, would be continued up to the end-March 2012.

In view of the sharp increase in the size as also the frequency of market borrowings by the State governments, the Reserve Bank took pro-active steps to manage the borrowing programme to contain excessive pressure on interest rates. The gross market borrowings raised by States in 2010-11 were lower by 21 per cent than those of the previous year. Reflecting the lower level of market borrowings, the growth in the outstanding stock of State Development Loans (SDLs) decelerated to 17 per cent during 2010-11 from the high growth rates witnessed during the crisis years of 2009-10 (29 per cent) and 2008-09 (35 per cent). It may be noted here that market borrowings were higher during 2008-09 and 2009-10 due to additional provisions allowed by the Centre. The interest rate profile of outstanding stock of SDLs shows that the share of high cost market loans (interest rate of 10.0 per cent and above) declined from 4.7 per cent as at end-March 2010 to 1.5 per cent as at end-March 2011. The share of loans with interest rates below 8 per cent which constituted over one-half of the total outstanding stock in end- March 2010 also declined to around 43 per cent in end-March 2011. The share of outstanding SDLs with interest rates ranging between 8-10 per cent, however, increased sharply from 45 per cent as at end-March 2010 to 56 per cent as at end-March 2011, which indicates that incremental debt was raised at a somewhat higher cost in 2010-11.

The weighted average yield of State government securities issued during 2010-11 stood higher at 8.39 per cent as compared with 8.11 per cent during 2009-10. During 2011-12 (up to March 6, 2012), 30 tranches of auctions were conducted under the market borrowing programme of the State governments and 24 States and UT of Puducherry raised an aggregate amount of `1,484 billion on a gross basis (net `1,292 billion) as compared with `985 billion (net `844 billion) raised by 22 States during the corresponding period of the previous year. The weighted average yield of gross market borrowings of States during 2011-12 (up to March 6, 2012) worked out to 8.76 per cent, i.e., higher than 8.39 per cent during the corresponding period of 2010-11.

The weighted average spread (i.e., the difference between the weighted average primary market yield of SDL on the day of auction and the secondary market yield of corresponding maturity of the Central government dated security on the same day) declined to 45 bps during 2010-11 from 86 bps during 2009-10. The lower spread during 2010-11 reflected several factors including lower market borrowings on account of the comfortable cash position of the States, lower average issuance size, and lower volatility in the yield of the 10-year benchmark government securities in the secondary market.

Keeping in view the surplus cash position of the State governments, the WMA limits of State governments have been left unchanged since 2006-07. The aggregate Normal WMA limit for States, including Government of Union Territory of Puducherry, was placed at `99 billion for 2010-11, which was the same as in the previous year. Consequent upon the supplementary agreement with the Government of Jammu and Kashmir, the aggregate WMA limit for 2011-12 was increased to `102 billion in April 2011. The rates of interest on Normal and Special WMA and OD continued to be linked to the repo rate. Most State governments have accumulated sizeable cash balances in recent years reflecting the fiscal consolidation measures undertaken since 2005-06. The liquidity pressures during 2010-11 were confined to a few State governments. Nonetheless, the monthly average utilisation of WMA and OD by the States in 2010-11 was higher. During 2011-12 (up to February, 2012), eight States resorted to WMA and four States availed of overdraft during the year. The daily average utilisation of WMA/OD by the States stood higher (`7 billion) during 2011-12 (up to February, 2012) as compared with `5 billion during the corresponding period of the previous year.

Most States continued to accumulate surplus cash balances although temporary dips were observed in some months. The surplus cash balances of State governments are automatically invested in 14-day Intermediate Treasury Bills (ITBs), the discount rate of which is fixed at one per cent less than the Bank Rate. The average investment in 14-day ITBs declined to `789 billion during 2010-11 from `845 billion during the previous year. The outstanding investments of States in ITBs stood at `1,013 billion as at end-March 2011 as against `938 billion as at end-March 2010. The average investment of the State governments in Auction Treasury Bills (ATBs) more than tripled to `96 billion in 2010-11 from `27 billion in the previous year. The outstanding investment of State governments in ATBs as at end-March 2011 was higher at `102 billion (`2.5 billion as at end-March 2010). Importantly, since mid- June 2010, States’ investments in ATBs have shown substantial increases, reflecting its positive return differential over ITBs. During 2011-12 (up to March 11, 2012), States’ investment in ITBs declined from `1,013 billion at the end of March 2011 to `852 billion as on March 11, 2012. However, States’ investment in ATBs increased from `102 billion to `327 billion during the period.

Special Theme – Role of the Reserve Bank in State Finances

The theme chapter ‘Role of the Reserve Bank in State Finances’, traces the growing responsibilities of the Reserve Bank beyond its mandated roles of serving as a banker and debt manager of the State governments. Besides extending banking services to all the States except Sikkim, the Reserve Bank has been effectively balancing the short-term financing requirements of States consistent with its objective of maintaining monetary stability. The Reserve Bank stipulated and revised upwards the levels for the interest free minimum balances of the States, based on certain indicators reflecting expansion in State finances. At the same time, it also had to grant Special and Normal Ways and Means Advances to the States within specified limits to tide over temporary liquidity mismatches in their revenues and expenditures. The Reserve Bank revised the WMA Scheme for the State governments from time to time, taking into account their fiscal situation, financial and institutional developments,and the objective of co-ordinating monetary and fiscal policies. The WMA limits of the States, which were linked to minimum cash balances, are being determined based on volume of their budgetary transactions. With the repo rate becoming an indicator of short term policy rate and more reflective of market conditions, the interest rates on WMA (normal and special)/overdrafts which were earlier linked to the Bank Rate, have been linked to the repo rate since April 2006.

As a debt manager, the Reserve Bank has, over the years, created the enabling conditions for States to switch over to a full-fledged auction system for market borrowings. The Reserve Bank’s conduct of market borrowings of State governments has evolved sequentially from underwriting system in the initial period to the gradual switch-over to auction-based market borrowings. The switch-over to auction-based market borrowings was supported by structural reforms, liberalisation of the fi nancial markets, the phasing out of automatic monetisation of Centre’s fiscal deficit and the introduction of a rule-based fiscal framework at both the Central and State government levels.

As part of its proactive approach to State finances during the post-reform period, the Reserve Bank assumed responsibilities beyond its traditional role of serving as a banker and debt manager to the States. The Reserve Bank also played a pivotal role in facilitating the rule-based medium-term fiscal consolidation of the States and advising them on policy issues emerging from time to time to ensure fiscal sustainability. With a view to build cushions for repayments of loans and meeting obligations under guarantees extended by States, the Reserve Bank has been administering the scheme of Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF), respectively. It has also played an active role in designing ‘Model Fiscal Responsibility Legislation’ for the States, which paved the way for the introduction of fiscal rules at the State government level under their FRBM Acts. Several of these initiatives were the outcome of intensive discussions at the interactive platform provided by the Reserve Bank in the form of Conference of State Finance Secretaries.

Conclusion

With the turnaround to revenue surplus at the consolidated level, State finances were budgeted to show an improvement in their GFD-GDP ratio as also in debt-GDP ratio during 2011-12. However, GFD-GSDP ratio of States worked out to be higher than the ThFC target for 2011-12. The budgeted fiscal stance of the State governments during 2011-12 is generally in consonance with the revised road map of the ThFC. As the second phase of rule-based fiscal consolidation has commenced for the States from 2011-12, the underlying emphasis should not only be on reverting to a sustainable fiscal path but also in drawing lessons from the past and developing new perspectives to address the key challenges. There is also a need to deal with the different structural constraints, particularly for States which could not achieve fiscal consolidation. The strategy towards integrated management of the overall expenditure enveloping various functions of the government for facilitating desired outcomes, as recommended by the High Level Expenditure Committee on Public Expenditure, is welcome. Successful restructuring of the public expenditure management system would, however, call for appropriate assimilation of the new system across the government machineries at all levels. An important fiscal challenge for the States is significant increase in financial losses of the State power distribution utilities and the attendant requirement for reassessing their potential impact on State finances.