The Hindu : Karnataka News : State on track to end revenue deficit

Online edition of India's National Newspaper
Friday, Dec 03, 2004

Karnataka

Karnataka

State on track to end revenue deficit

By T.S. Ranganna

BANGALORE, DEC. 2. The State is on track to meet its target of eliminating the revenue deficit by 2005-06, states a World Bank report titled "State Fiscal Reforms in India — Progress and Prospects." The Government has also budgeted a 3 per cent fiscal deficit target this year, one year ahead of schedule.

`Performance mixed'

In a chapter on "Fiscal Responsibility Legislation at the State Level in India: The Story So Far," the report notes that the first Fiscal Responsibility Act (FRA) was passed in Karnataka in August 2002, followed by four other States. Nevertheless, performance as measured by outcomes has been mixed. Kerala's FRA mandates the elimination of the revenue deficit by 2006-07, but its revenue deficit is budgeted to increase as a percentage of revenue receipts in 2004-05. Its latest mid-term fiscal plan shows the elimination of the revenue deficit in 2007-08, and that too on the assumption of a big increase in resource transfer from the Centre.

Reference to Act

Generally, the extent to which the Fiscal Responsibility Acts are "owned and valued" by the various States varies, but in all the States the Act is referred to in documents such as the budget speech, the report notes. Karnataka's Chief Minister had referred to it as a "fiscal Constitution for the State," indicating the importance the State attached to the legislation.

Multi-year plans

One lesson is that perhaps FRAs should not be rushed into, the report says. States should first start producing annual multi-year fiscal plans and strategies and the Acts can then be introduced as ways to provide them with legal backing. FRAs without serious multi-year plans that translate targets into realistic strategies may be of very little value. The media and the academic community have shown little interest in the performance by States in the matter of FRAs. Perhaps, that is reflective of the general scepticism about government commitments and performance, it says.

However, since the FRAs lack punitive provisions, without greater public scrutiny and attention they tend to fade into irrelevance. That is one area where agencies that interact with the States, such as the Government of India, the Finance and Planning departments, the Reserve Bank of India and the Comptroller and Auditor-General of India can play an active role by judging the performance of States against FRA targets. The report has also hailed Karnataka for reducing the fiscal deficit to 3.2 per cent. Haryana, with a population of 21 million, and Karnataka, with a population of 55 million, both experienced the fiscal deterioration that affected all States in the 1990s.

First to recover

Haryana was the first to recover. Its fiscal deficit, having risen to 5.1 per cent in 1998-99, fell to 2 per cent of GSDP in 2002-03. The State is now running a primary surplus (0.6 per cent of GSDP in 2002-03) and its debt stabilised as a percentage of GSDP in 2002-03.

Karnataka, according to `pre-actuals' for 2003-04, has reduced its fiscal deficit to 3.2 per cent of GSDP from a high of 5.4 per cent in 2001-02 and, unlike Haryana, virtually eliminated its revenue deficit. Budget figures should never be taken at face value, and Karnataka's good budgetary performance reflects in part a large and growing off-budget liability in the power sector.

There is also always the possibility that the adjustment achieved till now will be reversed in the coming years. Nevertheless, the fiscal adjustment achieved by these two States does hold out promise for all States, the report adds.

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