The fiscal situation of Odisha deteriorated from being in revenue surplus in the early 1980s to persistent deficits by the mid-1980s. As a result, the imbalance between the state’s own revenue receipts (SOR) and expenditure widened, forcing the diversion of other resources such as Central transfer (both share tax and grants) and borrowings to meet the expenditure in General Services. A high revenue deficit forces the state government to resort to higher borrowing, culminating in higher debt-servicing liabilities and a near debt trap situation.
Against this backdrop, the Odisha government has adopted a rule-based fiscal policy with medium-term fiscal targets through the enactment of the Fiscal Responsibility and Budget Management Legislation. The FRBM (Amendment) Act, 2016 has made it mandatory for the state to generate revenue surplus, contain the fiscal deficit within 3 per cent of GSDP, the ceiling of the Debt-GSDP ratio at 25 pc in the preceding year, and put in place a monitoring mechanism on the implementation of FRBM Act.
The Interim Budget 2024-25 has reconfirmed fiscal discipline and continuing best practices, despite being an election year that is around the corner. It has maintained a surplus in the Revenue Account of Rs 3,077 crore (4 pc of GSDP) which is higher than last year’s surplus. The entire revenue surplus and capital receipts have funded capital outlay to the tune of Rs 63,161 crore (6.82 pc of GSDP). Prudential Revenue Management has resulted in a lower fiscal deficit of 3 pc of GSDP. One of the best practices in Public Financial Management (PFM) is capital receipts should fund only capital outlay, not revenue expenditure as reflected in the Odisha Budget. Another best practice is the convergence of funds and diversified debt portfolios. This has resulted in a low debt servicing ratio, indicated by Interest Payment to Revenue Receipt at 3.71 pc. Besides, continuance with Primary Surplus has resulted in low debt intensity at 13.06 percent of GSDP. Because of the continuity of best practices in the Odisha Budget, more fiscal space has been created.
As part of best practices in PFM, the state has created a Consolidated Sinking Fund (CSF) for amortisation of open market borrowings. This will help the state to reduce any default risk through optimal debt management. The Guarantee Redemption Fund (GRF) and Escrow Account have been set up to mitigate any risk due to the Guarantee. Additionally, the state has established a Budget Stabilisation Fund (BSF) that intends to scale down counter-cyclical risk. These best practices in fiscal policies have enhanced the creditworthiness of the state. The PFM in Odisha has also adopted the best practices of the Cash Management System to ensure improved utilisation of the budgetary allocation through the even-pacing of expenditures.
The size of the budget has been pegged at Rs 2.5 trillion (27.53 pc of GSDP). However, the state could have increased the expenditure by another 0.50 pc of GDP (approx. Rs 4,630 crore) keeping in the view the ensuing election. However, the state has preferred to continue with fiscally disciplined and quality spending with a credible budget.
Dr Asit Mohanty
Professor in Finance, XIMB, XIM University, Bhubaneswar