New Delhi: The financial position of many states is not strong and the debt burden prevents them from spending on capital assets, no one is aware of. But it has now forced the central government to issue warnings and suggest material changes in state spending to prevent default.
TV Finance Secretary Somanathan, at a meeting with the heads of state secretaries in Dharamsala from June 15-17, made several suggestions to help states improve their finances. Prime Minister Narendra Modi also attended the meeting. Suggestions include “streamlining autonomous schemes and bodies and measures to reduce inefficient subsidies.”
Some of the possible measures suggested by Somanathan to reduce the state revenue deficit include the periodic increase in property taxes, the regular increase in the tax on various government services such as water, and the increase in property taxes. special tax on liquor from time to time.
The recommendations were part of a presentation. A copy of this is with ThePrint.
In 2012, the 15th Finance Commission also insisted on periodic increases in property tax rates in municipalities in line with inflation and growth.
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These suggestions come after the Reserve Bank of India released a detailed study last month, in which it described at least 10 states that have shown a slowdown in their own tax revenues, a growing share of committed spending and an increase in burden of subsidies. His expenses had already increased due to the Kovid-19.
According to the study, the state of Bihar, Kerala, Punjab, Rajasthan, West Bengal, Andhra Pradesh, Jharkhand, Madhya Pradesh, Haryana and Uttar Pradesh is worrying. Most of these states have exceeded the debt levels set by the 15th Finance Commission.
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‘Autonomous bodies, streamline plans’
In the presentation, Somanathan said states should follow the Center and implement some of the recent decisions they made last month.
He cited the example of 231 autonomous bodies collected by the central government for a detailed review. Following the review in May 2022, it was decided to reduce, among other things, 112 autonomous bodies through merger, closure and dissolution.
Somanathan said streamlining would not only “reduce unproductive administrative costs,” but also “break down silos between organizations, which are supposed to collaborate with better outcomes and service to the public.”
“States can take that step and the leadership of secretaries in chief will be important in that,” he said.
He said breaking the silos between cooperating organizations could lead to better results and service to the public.
Similarly, the Secretary of the Treasury suggested that “states can improve their plans by streamlining them, reducing administrative costs.”
He mentioned that since 2016 of the 130 centrally sponsored schemes (CSS), 60 were merged with larger projects and five were closed.
This reduced the number of CSS to 65. For example, 10 Department of Livestock programs were merged into one: National Livestock Development Scheme. He said this has been done so that states can use this fund flexibly.
In a CSS scheme, the expenditure is generally divided between the Center and the State in a ratio of 6: 4.
In 2021, the 15th Finance Committee also recommended the phasing out of funding for CSSs and their subcomponents, which have lost their usefulness or have budgets commensurate with the national program.
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reduce inefficient subsidies
Describing it as an important step, Somanathan suggested that one of the options for reducing states ’revenue deficit — when total government revenue spending exceeds their total revenue — is to reduce inefficient subsidies.
Inefficient subsidies can be defined as the things that encourage the consumption of waste. In this no cost can be recovered from the beneficiaries and we can see how its side effects are pollution or excessive water consumption.
In his presentation, the Secretary of the Treasury said: “The reduction of this subsidy will be a big step towards the long-term financial situation of the states.”
The Center pointed to the supply of free electricity without meters to farmers as an example of inefficient subsidies. This has led to “economic losses and maturities, as well as misuse of electricity, theft and excessive use of water for agriculture.”
As a solution, the Secretary of the Treasury suggested, “Although concessions have been made, the measurement is an important step.” Along with this, prepaid measurement is also another important step for which the Ministry of Energy offers financial aid.
The government of the Aam Aadmi Party (AAP) in Punjab was recently criticized for providing up to 300 units of free electricity to all households in the state as it would create system inefficiencies and increase the financial problems of the state.
Rising state debt is worrisome
The presentation analyzed in detail the finances of the state and highlighted the worrying increase in the debt of some states.
For example, the annual rate of outstanding liabilities (excluding off-budget loans and electricity sector installments) between 2015 and 2020 was highest in Telangana (30.6%), followed by Chhattisgarh (22.5%). ), Odisha (21.7%), Arunachal. Pradesh (20.9%) and Tamil Nadu (19.2%).
Outstanding liabilities as a ratio of state GDP in 2019-20 were Nagaland’s highest with 47%. While in Arunachal Pradesh and Punjab its percentage was 43. For about 21 states, outstanding liabilities with the GSDP or state revenues were over 25% in 2019-20.
Since 90 percent of state revenue is spent in the form of income expenses such as salaries, pensions, free subsidies, it prevents states from spending on capital formation. It has a big impact on development.
States like Punjab, Kerala, West Bengal and Maharashtra only spent up to 10% of their total budget on capital expenditures between 2015 and 2020. This was compared to the Center’s expenditure on capital expenditures around of 18 per cent of its total expenditure.
In a better position than these, Odisha spends 21.2% of the total budget, Uttar Pradesh 18.5%, Bihar 18% and Gujarat and Jharkhand 17.8% in capital expenditures.
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