Overall Financial Position of Himachal Pradesh – Comment

News about the difficult financial position of the State of Himachal Pradesh over the last few years has been doing rounds before and after presentation of the budget for 2011-12 by the State Government. Reports have come through in the media that the State Government was not allowed the promised borrowings for financing its plan and it did not have enough resources to meet the revenue expenditure burden on account of committed expenditure like salaries, pensions and interest payments. The pay and pension revision dues to the employees and pensioners are being staggered over time and would probably take another two or three years to get completely disbursed. The State government has been alleging a raw deal by the Thirteenth Finance Commission in terms of meeting its committed liabilities on account of revenue expenditure. The ongoing session of the State Legislature has also witnessed allegations and counter-allegations about the raw deal being meted out by the Central Government to the State of Himachal Pradesh. These and several related issues on this aspect are definitely a subject of detailed research and examination but a quick view of the overall financial situation of the State can give reasonable indications of the position where the truth lies.

Himachal Pradesh is a special category State and its financial existence and sustenance is heavily linked to the liberal central transfers of resources through the platforms of the Finance Commissions and the Planning Commission. But for these transfers, the special category States like Himachal Pradesh can not even afford to pay its employees and pensioners the full salary and pension burden for the whole year, leave aside anything in the nature of development or servicing the interest liability of the borrowings contracted by the State in the past and the principal repayments. History is witness to the fact that even after liberal fiscal transfers through the Finance Commissions to the special category States, further erosion in the revenue account has been taken care of by the scheme of plan financing for these States by internalising the negative balance from current revenues in the scheme of plan financing. Himachal Pradesh is not an exception to this scenario and whatever has happened in the State by way of development is a function of the central developmental and non-developmental transfers since attainment of Statehood and their effective utilisation by the successive governments in the State. The people, State and the Governments of Himachal Pradesh from time to time have not been ungrateful in recognizing this fact and have acknowledged the contribution of the Central Government several times over. Local level politics has, of course, been vitiated by putting the blame on the opposition or the ruling party on the one hand, and on the central government, on the other. This basically is spice and not the reality and should not be taken cognizance of by informed people.

A State which suffers from the malaise of poor fiscal situation has to be more vigilant to the issues of financial management. It has to do all that is necessary to manage the revenue account and also to be prudent that fresh borrowings do not infringe the fiscal deficit parameters. Any laxity on the revenue deficit or fiscal deficit management can lead the State to a debt trap from where it is impossible to get out.

Let us first of all look at the dispensation of the Thirteenth Finance Commission for Himachal Pradesh because the State Government has been arguing that it was not given a fair deal in regard to assessment of the revenue account by the Commission. To make a comment about it, it is imperative that one studies the data which is available through the report of the Thirteenth Finance Commission. The comparative picture on the forecast submitted by the State Government and the assessment made by the Thirteenth Finance Commission for Himachal Pradesh for the period 2010-15 is depicted in the sub-joined table:-

(Rs. crore)

* : The other expenditure includes Salaries, expenditure on general, social and economic services to be met through the non-plan spending, assignments to local bodies and expenditure on committed liabilities.
Note : The numbers may not exactly tally due to rounding.

A careful look into the figures in the above table indicates that there is hardly any significant variation in the assessment of revenue receipts between the forecast projected by the State Government and the assessment made by the Finance Commission despite the fact that the Commission proceeded to do the assessment based on definitive normative considerations. The State Government had used the historical methodology to generate the forecast whereas the Finance Commission has linked the revenue receipts to the projected growth in the State Domestic Product. The variations, however, are large and significant on the expenditure side. It would be extremely relevant to look at the methodology used by the Finance Commission to estimate the expenditure side inputs. The Finance Commission has used the following methodology for estimating the major components of the expenditure across the board for all States:

• Finance Commission assumed that the States have implemented the revised pay scales from 1.4.2009 with retrospective effect from 1.1.2006. Therefore, the budget estimates of the year 2009-10 were used by the Finance Commission to build salary expenditure into the forecast period.
• The Commission has used one time increase of the order of 35 per cent in the salary expenditure for 2006-07. Thereafter, it provided 6 per cent per annum growth after taking into account 3 per cent annual increment, 6 per cent dearness allowance and 1 per cent attrition. The salary expenditures for the central and the State Government employees have been projected on this basis for the period 2006-10.

• Expenditure on the salaries of the local bodies employees has also been added to the expenditure base for forecasting it into the 2010-15 period.

• The Finance Commission has limited the impact of pay revision to salary expenditure to a ceiling of 35 per cent of the total revenue expenditure and the expenditure over and above this ceiling has been successively reduced by 10 per cent of the amount every year.

• For the expenditure on pensions, the Commission has worked out the impact on State pensions to be higher by 21 per cent over the 2008-09 pension expenditure which was arrived at by applying the trend growth rate over the actuals of pension expenditure for 2007-08. Pension expenditure post-2009-10 has been projected to grow at 10 per cent per annum.

• Interest payments have been projected on the basis of the debt stock indicated in the fiscal reform path framed by the Commission. For the years 2008-09 and 2009-10, the lower of the revised estimates or 3.5 per cent of the GSDP and Budget Estimates or 4 per cent of the GSDP, respectively, has been taken as the fiscal deficit for projection of the debt stock.

The above assumptions are basically responsible for the vast difference between the forecast made by the State Government and the assessment made by the Finance Commission. Since the Commission has used uniform methodology for all the States, there is precious little ground for any individual State to hold out a grudge against the dispensation worked out by the Finance Commission. The most critical input into the assessment methodology is the data presented by the State Government while presenting the budget for the year 2009-10 because the Commission methodology leans on entirely on the Budget Estimates for the year 2009-10 for the purposes of the salary expenditure. Hence the salary expenditure in the Budget Estimates had to be close to the number after taking into account the impact of pay revision.

Now that the data of actual expenditure for the year 2009-10 has become available, it will be interesting to compare the budget estimates for 2009-10 with the actuals of the expenditure to see if the two differed significantly from each other. The data on the opening balance, revenue receipts, revenue expenditure and closing balance after taking into account the capital and loans accounts for the last few years is contained in the following table:-

OVERALL FINANCIAL POSITION OF HIMACHAL PRADESH

SOURCE: Budget Documents of the Government of Himachal Pradesh.

NOTES:

• *: This is after taking into account the capital account, loans and advances, etc.
• BEs stands for the Budget Estimates.
• REs stands for the Revised Estimates.
• $ : Revenue receipts include State’s own tax and non-tax revenues; the share in central taxes and revenue deficit grants from the Finance Commission dispensation; and the grant part of the central assistance for plan financing.
• All figures are in Rupees crore.

The data on the revenue account for the year 2009-10 indicates that according to the budget estimates (which became the basis for the Thirteenth Finance Commission to estimate the salary expenditure along with the cap of restricting it to 35 per cent of the revenue expenditure), the year had been projected to have a surplus of Rs. 256.57 crore. When a State presents a revenue account surplus budget for the base year for an assessment by the Finance Commission, it must understand that it is going to have a huge impact on the overall revenue account deficit. Against these budget estimates, the actual expenditure data for 2009-10 now available indicates a deficit of Rs. 804.65 crore. This implies that the budget estimates were about Rs. 1,060 crore off the mark. On a simple assumption, this could have meant an underassessment of about Rs. 6,000 crore over the 2010-15 period. This is one part of the problem. The overall data for this year indicates that the budget estimates had a revenue account surplus of about Rs. 257 crore and the State could have done well with lesser borrowings in this year as well. The actuals for this year show a revenue deficit of about Rs. 805 crore which should have led to a closing balance of about Rs. 325 crore instead of Rs.583 crore had the State Government contracted less fresh borrowings to the tune of about Rs. 258 crore. To see how well or badly the State is presently doing on major items of revenue expenditure vis-à-vis its projections to the Finance Commission, it is of interest to look at the comparative data for the forecast to the Commission and the budget estimates for a sample year like 2011-12 (because by now the expenditure patterns post pay revision are expected to have stabilised). This data is depicted in the following table:-

FORECAST TO 13TH FINANCE COMMISSION AND BUDGET ESTIMATES FOR SALARY, PENSION AND INTEREST PAYMENTS LIABILITIES FOR THE YEAR 2011-12

(Rs. crore)

Source:

1. The forecast data has been taken out of the Memorandum presented by the State Government to the Finance Commission.
2. The budget estimates data is from the Budget presented to the State Legislature.

This data presents an interesting picture. Although the salary and pension expenditure in the budget estimates for 2011-12 are marginally higher than the forecast figures, the interest payment liability is about Rs.250 crore lower than the forecast figure. At an overall level, the revenue expenditure on the three major components for the year 2011-12 is about Rs. 250 crore lower than the forecast figure. Since the budget estimates emerge from historical trends, this data can be considered fairly representative of the reality. It is, however, important to mention that there exists a wide gap between the allowance made by the Commission for salary, pensions and the interest payments expenditure and the forecast presented to the Commission by the State government as explained in the preceding text. The State Government had projected an expenditure of Rs. 13,138 crore for pension liability and Rs. 14,575 crore for interest payments against which the Finance Commission allowed provisions of Rs. 8,822 crore and Rs. 10,290 crore, respectively.

Now let us come to comment upon the overall financial position. The data in this behalf are presented in the following table for six years to take a medium term look at the overall scenario.

OVERALL FINANCIAL POSITION OF HIMACHAL PRADESH

SOURCE: Budget Documents of the Government of Himachal Pradesh.

NOTES:

• *: This is after taking into account the capital account, loans and advances, etc.
• BEs stands for the Budget Estimates.
• REs stands for the Revised Estimates.
• $ : Revenue receipts include State’s own tax and non-tax revenues; the share in central taxes and revenue deficit grants from the Finance Commission dispensation; and the grant part of the central assistance for plan financing.
• All figures are in Rupees crore.

A quick perusal of the data in the above table reveals that with the exception of the budget estimates for 2010-11 when the State Government presented a budget with a revenue account deficit of about Rs. 505 crore, year after year, the State Government has been presenting a revenue account surplus budget. In layman’s language it means that the revenue receipts are larger than the revenue expenditure. Now we look at the closing balance for various years. It presents a history of overall surplus position after taking into account the capital and loan accounts. When a State has a history of budgets having surplus on the revenue account and it also has consistently positive closing balances, the story of the State being in a difficult financial situation does not hold much water. In fact, using the revenue account surplus to finance the much needed capital expenditure and also to reduce the leaning on fresh borrowings is what fiscal prudence dictates.

Let us look at the individual years. For 2006-07, the actual data reveals that the fiscal year operations had an overall surplus since the opening deficit was mitigated by about Rs. 45 crore as the closing balance shows an improvement over the opening deficit. For 2007-08, the year has a nominal opening deficit of Rs. 37 crore and the year ends with a closing balance of about Rs. 1,122 crore, indicating an overall improvement of Rs. 1,159 crore. Of this, the revenue account surplus contributes about Rs. 850 crore and the remaining improvement of about Rs. 309 crore in on the capital account. The surplus on the capital account is basically fresh loans contracted by the State Government. Fiscal prudence would have demanded not to contract fresh borrowings for enhancing the closing balance without any commitment for higher capital expenditure and also for not raising the overall debt stock the servicing of which would impact the revenue expenditure on account of interest payments and capital expenditure by way of servicing the principal in the future years. The line corresponding to the year 2008-09 actuals indicates that there was a revenue account deficit of about Rs. 130 crore but the opening and closing balances remained nearly static at Rs. 1,122 crore to Rs. 1,129 crore, respectively. Even in this year, the borrowings could have been reduced by at least Rs. 137 crore. The story of 2009-10 has been commented upon in the earlier paragraphs and needs no further discussion.

For 2010-11 and 2011-12, similar story gets repeated when one looks at the budget estimates or the revised estimates. The reality will emerge after we get the actual expenditure data as we go along.

One would like to leave this with a few comments. Firstly, if the revenue account generates a surplus for any fiscal, prudence demands that the State government should borrow less to improve its fiscal deficit position. The bodings are that over the last six years, the revenue receipts and revenue expenditure aggregates have grown at about 12.9 per cent per annum each and if the State Government continues to manage its expenditure containment effort, it would end up with revenue account surplus on a sustained basis. The more important message in this is that the interest payments burden has started getting restrained as a result of a series of efforts starting with debt reset, debt swap and rescheduling along with the debt capping prescribed by the successive Finance Commissions. Therefore, there is an urgent need for expenditure compression on the salary burden. The maintenance expenditure for the existing infrastructure should be the highest priority so that the stock of infrastructure is put to good use for enhanced performance of the economy.

On the revenue receipts side, the future lies in revenues from the hydro-electric sector. The last decade and a half has not seen the desired frenetic activity to expeditiously harness the potential. The future of hydro-electricity is not very long as other clean energy options tend to become competitive in pricing and more so, on the environmental considerations. The State Government should have a clearly defined policy set up for a given time frame of at least 15 years and should not keep tinkering with it for various reasons best known to everyone. The revenues from State’s own taxes have an inherent constraint of growth due to the overall size of the economy and the diversity of the economic activity. These will probably show a buoyant trend soon after the introduction of the composite Goods and Services Tax which has recently been cleared by the Union Government for a short run and then plateau out.

Secondly, the closing balance of a larger order being rolled over year after year also needs to be curtailed in a systematic manner to manage the fiscal deficit parameters. Thirdly, the revenue account surplus indicates that the State government is abiding by its Fiscal Responsibility and Budget Management Act and deserves to be congratulated for that.

Lastly, as the revenue receipts of the State Government improve into future and it simultaneously takes charge of the revenue expenditure management, it should understand to expect less and less revenue deficit grants from the future Finance Commissions. It may be remembered that the dispensation of the Thirteenth Finance Commission resulted in three of the Special Category States, namely Assam, Sikkim and Uttarakhand, becoming revenue account surplus after the statutory tax devolution.

DK Sharma

Devinder Kumar Sharma, a former Principal Adviser and Secretary Planning, Government of Himachal Pradesh, is a visiting professor and an economist. He lives in Shimla.