STATE FINANCES A STUDY OF BUDGETS OF 2016-17

[Pages:376]STATE FINANCES A STUDY OF BUDGETS OF

2016-17

RESERVE BANK OF INDIA

May 2017

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? Reserve Bank of India 2016 All rights reserved. Reproduction is permitted provided an acknowledgement of the source is made.

Published by Sunil Kumar for the Reserve Bank of India, Mumbai 400 001 and designed and printed by him at Alco Corporation, A Wing, Gala No. 28, Ground Floor, Virwani Industrial Estate, Goregaon (E), Mumbai - 400063

FOREWORD

The Reserve Bank of India (RBI) brings out an annual publication entitled "State Finances: A Study of Budgets" which analyses the fiscal position of state governments on the basis of primary state level data. From 2005-06 onwards, this report has been structured around a special theme of topical relevance. The current report's theme is the goods and services tax (GST). The salient features that emerge from the analysis of state finances in the report are:

? The GST is likely to strengthen cooperative federalism and have far-reaching implications for growth, inflation, public finances and external competitiveness in the Indian economy, drawing on the evidence of significant efficiency gains revealed in empirical evaluation of the implementation of VAT in 2005.

? The GST is likely to bolster states' revenue and anchor fiscal consolidation without compromising on expenditure quality.

? Seamless implementation of GST is contingent upon a robust dispute resolution mechanism and a sound information technology (IT) infrastructure.

? From a medium term perspective, the GST assumes significance in the context of the debt sustainability of states and the evolving contours of state finances.

The report has been prepared in the Fiscal Analysis Division (FAD) of the Department of Economic and Policy Research (DEPR) under the overall guidance of Shri B.M. Misra, Principal Adviser. The report was prepared under the supervision of Dr. Rajiv Ranjan, Adviser and his team led by Shri Indranil Bhattacharyya, Director. Other members of the team included Dr. Atri Mukherjee, Dr. P.S. Rawat and Dr. Brijesh P. (Assistant Advisers); Shri Anand Prakash Ekka and Shri Khaijamang Mate (Research Officers). Data compilation support was provided by Smt. E. Fernandes, Shri G.N. Hamand and Smt. V. Hashita.

Support was also received from the regional offices of DEPR, other departments of the Reserve Bank (Department of Government and Bank Accounts and Internal Debt Management Department), finance departments of state governments and union territories, the Ministry of Finance, Government of India, the NITI Aayog and the Office of the Comptroller and Auditor General (CAG) of India. This report is available on the RBI's website (.in). Feedback/comments are solicited to help improve the analytical or informational content of the report. They may be sent to the Director, Fiscal Analysis Division, Department of Economic and Policy Research, Amar Building (6th Floor), Reserve Bank of India, Shahid Bhagat Singh Road, Mumbai 400 001 or through email to deprfad@.in.

Michael Debabrata Patra Executive Director May 12, 2017

CONTENTS

Foreword List of Abbreviations Chapter I: Overview Chapter II: Fiscal Position of State Governments

1. Introduction ................................................................................................................ 2. Accounts: 2014-15 ..................................................................................................... 3. Revised Estimates: 2015-16 ...................................................................................... 4. Budget Estimates: 2016-17........................................................................................ 5. Budget Estimates: 2017-18........................................................................................ 6. Outstanding Liabilities of State Governments............................................................ 7. Debt Sustainability of Indian States............................................................................ 8. Concluding Observations........................................................................................... Chapter III: Goods and Services Tax: A Game Changer 1. Introduction ................................................................................................................ 2. The Concept .............................................................................................................. 3. The Cross Country Experience ................................................................................. 4. The Indian Context ? Overview and Status................................................................ 5. Experience of Indian States with VAT ........................................................................ 6. Concluding Observations .......................................................................................... Chapter IV: Issues and Perspectives 1. Introduction ................................................................................................................ 2. Debate on the Revenue Neutral Rate ........................................................................ 3. Dispute Resolution Mechanism and IT Infrastructure ................................................ 4. Administrative Control of GST ................................................................................... 5. Fiscal Federalism and GST ....................................................................................... 6. Central Transfers to States ........................................................................................ 7. Implications of Special Levies ................................................................................... 8. Concluding Observations........................................................................................... Chapter V: Way Forward

Page No.

1

3 3 5 9 12 13 16 19

20 21 23 27 29 33

35 35 38 39 40 42 44 46 48

i

Annex I ? GST Council Meeting and Major Decisions ? Timeline .................................. Annex II ? Stochastic Frontier Analysis ? Methodology ................................................. References .......................................................................................................................... Explanatory Note on Data Sources and Methodology.....................................................

Page No. 51 55 56 60

LIST OF BOXES

II.1

Relaxation of Fiscal Rules for States ..........................................................................

11

II.2

Debt Sustainability of Indian States ? Inter-Temporal Budget Constraint Approach ..

18

III.1

What GST Implies for Various Economic Agents .......................................................

22

III.2

Impact on Inflation ......................................................................................................

25

III.3

Integrated Goods and Services Tax (IGST).................................................................

29

IV.1

Can there be an Optimal Rate for Taxing Commodities..............................................

36

IV.2

Goods and Services Tax Network (GSTN) .................................................................

39

LIST OF TABLES

II.1

Major Deficit Indicators of State Governments .....................................................

4

II.2

Fiscal Imbalances in Non-Special and Special Category States ..........................

4

II.3

Aggregate Receipts of State Governments ..........................................................

5

II.4

Expenditure Pattern of State Governments ..........................................................

6

II.5

Variation in Major Items ........................................................................................

7

II.6

Deficit Indicators of State Governments ...............................................................

8

II. 7

Decomposition and Financing Pattern of Gross Fiscal Deficit ..............................

10

II.8

Composition of Expenditure on Social Services

(Revenue and Capital Accounts) ..........................................................................

13

II.9

Major Deficit Indicators of State Governments .....................................................

13

II.10 Outstanding Liabilities of State Governments ......................................................

13

II.11 Composition of Outstanding Liabilities of State Governments ...............................

14

II.12 Maturity Profile of Outstanding State Government Securities ..............................

15

II.13 Fiscal Sustainability of All State Governments ? Indicator-based Analysis...........

17

III.1

Taxes subsumed under GST ................................................................................

21

III.2

VAT and GST ........................................................................................................

30

ii

Page No.

III.3

VAT/GST Rates ? Select Countries ......................................................................

23

III.4

GST Revision in Singapore ..................................................................................

26

IV.1

Revenue Neutral Rate ..........................................................................................

37

IV.2

Share of Revenue of State Governments .............................................................

42

IV.3

Cess imposed by the Central Government ...........................................................

44

IV.4

Surcharge Imposed by Central Government ........................................................

45

IV.5

Special Levies by the Central Government ..........................................................

45

LIST OF CHARTS

II.1

Major Deficit Indicators..........................................................................................

3

II.2

Gross Fiscal Deficit ...............................................................................................

9

II.3

Committed Expenditure ........................................................................................

9

II.4

Social Sector Expenditure ....................................................................................

12

II.5

Debt and Interest Burden ...................................................................................

14

II.6

Utilisation of WMA and Overdraft by States .........................................................

16

III.1

VAT/GST Rates ....................................................................................................

23

III.2

State Revenue Portfolios ......................................................................................

30

III.3

The Growth-and-Volatility Efficiency Frontier: Sales Tax ? NSC States ................

30

III.4

The Growth-and-Volatility Efficiency Frontier: Sales Tax ? SC States ..................

31

LIST OF APPENDIX TABLES

1

Major Deficit Indicators of State Governments .....................................................

65

2

Devolution and Transfer of Resources from the Centre ........................................

66

3

Development and Non-Development Expenditure ................................................

68

4

Development Expenditure ? Major Heads ............................................................

69

5

Non-Development Expenditure ? Major Heads ....................................................

70

6

Development and Non-Development Expenditure ?

Plan and Non-Plan Components ..........................................................................

71

7

Composition of Social Sector Expenditure ...........................................................

72

8

Decomposition of Gross Fiscal Deficit ..................................................................

74

iii

Page No.

9

Financing of Gross Fiscal Deficit ..........................................................................

75

10

Financing of Gross Fiscal Deficit ? As Per cent to Total .......................................

76

11

Composition of Outstanding Liabilities of State Governments .............................

77

12

Composition of Outstanding Liabilities of State Governments -

As Proportion to Total ...........................................................................................

78

13

State Government Market Borrowings .................................................................

79

LIST OF STATEMENTS

1

Major Fiscal Indicators ..........................................................................................

83

2

Revenue Deficit/Surplus .......................................................................................

85

3

Gross Fiscal Deficit/Surplus .................................................................................

86

4

Decomposition of Gross Fiscal Deficit ..................................................................

87

5

Financing of Gross Fiscal Deficit ? 2014-15 (Accounts) .......................................

88

6

Financing of Gross Fiscal Deficit- As per cent to Total ? 2014-15 (Accounts) ......

89

7

Financing of Gross Fiscal Deficit- 2015-16 (RE) ..................................................

90

8

Financing of Gross Fiscal Deficit- As per cent to Total ? 2015-16 (RE) ................

91

9

Financing of Gross Fiscal Deficit ? 2016-17 (BE) .................................................

92

10

Financing of Gross Fiscal Deficit- As per cent to Total -2016-17 (BE) ..................

93

11

Development Expenditure ....................................................................................

94

12

Non-Development Expenditure .............................................................................

95

13

Interest Payments .................................................................................................

96

14

Tax Revenue .........................................................................................................

97

15

Non-Tax Revenue .................................................................................................

98

16

Loans from the Centre ..........................................................................................

99

17

Devolution and Transfer of Resources from the Centre ........................................

100

18

Composition of Outstanding Liabilities .................................................................

101

19

Total Outstanding Liabilities of State Governments ..............................................

104

20

Total Outstanding Liabilities ? As percentage of GSDP .......................................

105

21

Market Borrowings of State Governments ............................................................

106

iv

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