This budget season, the dispatch from states is transmitting only one message: Houston, we have a problem!
States are hauling in less revenue from the tax door, but spending more via the expenditure door. They want to borrow and call it even, but the Centre has imposed stringent borrowing limits even at the risk of being seen as a scowling schoolmarm.
Left with little choice, Kerala's finance minister KN Balagopal charged headfirst, eyes tight shut, last week. He staked his shirt on drastic revenue mobilizing measures, taxing everything he could lay his hands on -- fuel, liquor, stamp duties and so on. Perhaps, the FM may be right. To get, one must give. But his proposals tore into the hearts and tear ducts of citizens so much that it's forcing the government to rethink.
This said, Kerala maintains all its charges against the Centre with regards to cesses, debt limits and state transfers, which it believes has landed them with a wide fiscal gap -- the so-called fiscal blackhole.
On the other side is the union government, which wants states to absorb Lesson One in economic orthodoxy -- that they cannot indefinitely spend more money than they take in. States are desperate and want to hear none of it. In fact, southern states including Tamil Nadu and Telangana have been petitioning the Centre waving the 'Save-our-States' SOS messages for sometime now.
Last week, Kerala raised it once again and Telangana picked up the baton on Monday.
"The state has the financial position to take more loans. The central government continues a conservative stance. The state should be able to take more loans for development projects. Kerala's Alternative Development Policy fails due to the central government's stand. Kerala has come so far by overcoming the crisis," thundered KN Balagopal, Finance Minister of Kerala in his budget speech last week.
On cue, T Harish Rao, Finance Minister of Telangana accused the Centre of acting against 'the spirit of federalism and eroding the rights of the States.'
"During the current year, based on State’s economic performance and borrowing limits, Rs 53,970 crore was included in the Budget as borrowings. But Centre unilaterally imposed a cut of Rs 15,033 crore and reduced Telangana's borrowing limits to Rs 38,937 crore -- totally unjustified and uncalled for," he said while recalling his desperation that led to resorting to off-budget borrowings.
According to the RBI data, the budgeted gross fiscal deficit of states in FY23 stood at 3.4% of GDP, higher but within the 4% target set by the Centre. The trouble is, there are substantial inter-state variations and on last count, as many as 10 states are highly-indebted -- in public finances.
This scared the staff at RBI so much that they put out a paper with spotlight on fiscal risks confronting states last July. They reasoned that handing out cash subsidies, free utility services, revival of the old pension schemes and extension of implicit and explicit guarantees by states are proverbial 'swords of Damocles.'
The central bank's latest report on State Finances too makes a detailed observation of how during FY23, the states budgeted an increase in revenue spending, mainly led by non-developmental expenditures such as pension and administrative services, but a decline in medical and public health and natural calamities.
Such fiscal profligacy on administrative expenses needs to be curbed. While austerity is painful, expenditure rationalization is as essential, and not doing so can empty an ocean, literally.
Take Kerala and Tamil Nadu. Its committed expenditure including salaries, pensions and interest payments accounts for over 71% and 68% of total expenditure respectively in FY23. In contrast, the union government's outgo on pensions and interest payments, excluding salaries is 24%.
To put it another way, of the Rs 1.76 lakh crore-expenditure budget announced for FY24 in Kerala, about Rs 1 lakh crore would be spent on salaries, pensions and interest payments, while just about Rs 70,000 crore goes towards discretionary spending including education, healthcare and other welfare measures. Moreover, of the projected Rs 40,000 crore borrowing in next fiscal, more than half will be in lieu of salaries, pensions and interest payments, unlike the union government that's spending a kings ransom on capital expenditure.
To encourage states and increase capex allocations, last week, Finance Minister Nirmala Sitharaman extended the 50-year interest-free loan to states for capital investments by one year. These long-term loans are over and above the normal borrowing ceiling allowed for states, and should help them to prioritize spending on productive assets.
High borrowings are acceptable as long as states have adequate interest cover (revenue receipts divided by interest payments). Worryingly, the southern states of Tamil Nadu and Kerala, according to RBI's calculations, appear weak with an interest cover under six times.
Another annoying factor for states is the revenue buoyancy that took a knock following GST rollout. And the cessation of the compensation cess this fiscal dealt a huge blow on state finances. Besides, states have also been complaining about the reduction in central transfers. For instance, last November, Palanivel Thiaga Rajan, Finance Minister of Tamil Nadu reiterated concerns about the union government increasing the levy of cesses and surcharges and demanded that they be merged with the basic rates of tax for the states so that they can receive their legitimate share in devolution.
"Centralisation of power and disregard for states, especially Kerala, has increased unprecedentedly. Kerala is being sidelined in the allocation of centrally sponsored schemes also. Can anyone with a commitment to the people of Kerala justify this situation? On whose side do those who celebrate this disregard stand?" questioned Balagopal last week.
He anticipates a shortage of nearly Rs 20,000 crore in revenue deficit grant, due to cessation of GST compensation, and resource loss due borrowing limits.
Telangana's Rao too accused the central government of breaking the tradition of implementing in toto the recommendations of the Finance Commission. For 2021-26, the 15th Finance Commission recommended grants amounting to Rs 5,374 crore to Telangana. But by denying these grants, grave injustice has been done to Telangana. No government has ignored the recommendations of the Finance Commission in such a blatant manner, Rao slammed the Centre.