STATE FINANCESA STUDY OF BUDGETS OF

2009-10

RESERVE BANK OF INDIAFEBRUARY 2010

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Published by Gunjeet Kaur for the Reserve Bank of India, Shahid Bhagat Singh Road, Fort, Mumbai - 400 001 and designedand printed by her at Alco Corporation, A2/72, Shah and Nahar Industrial Estate, Lower Parel (W), Mumbai - 400 013.

FOREWORD

“State Finances: A Study of Budgets” is a unique Report which provides a comprehensive picture on State

government finances. This Report has been published since 1950-51. Till 1998-99, this study used to be

published as a part of the RBI Monthly Bulletin. From 1999-00 onwards, this Study is being published as a

stand-alone publication. This publication analyses major budgetary variables not only at the individual

State level but also provides a holistic view at the consolidated level. The analysis, orientation, coverage

and format of the Report have been restructured from time to time to make it more contemporary. In this

context, the Report goes beyond the budgets by sourcing additional information/data from State governments

on parameters such as fiscal stimulus packages and expenditure on salaries on account of implementation

of recommendations of Sixth/State Pay Commissions. To enable researchers to have easy access to time

series data, the RBI brought out a ‘Handbook of Statistics on State Government Finances’ in 2004, which

contained State-wise time series data on major fiscal indicators since 1980-81 and detailed data under

revenue and capital accounts since 1990-91.

To impart detailed and comprehensive coverage on various issues having important bearing on State

government’s finances and to enhance the analytical content, a special theme based analysis has been

initiated since 2005-06. So far, special themes on ‘Outstanding Liabilities of State Governments’, ‘Social

Sector Expenditure’, ‘Fiscal Transfers to the State governments’ and ‘Revenue Receipts of the State

Governments – Trend and Composition’ have been presented during past four years. In continuation to

this trend, the special theme of this year’s Report, “State Finances: A Study of Budgets of 2009-10” focuses

on expenditure management i.e., “Expenditure of State Governments – Trend and Composition”.

The salient features of the Study are as follows:

• The consolidated revenue balance of the States, after remaining surplus for three consecutive years, is

budgeted to turn into a deficit of 0.5 per cent of GDP in 2009-10 (BE).

• Reflecting the deterioration in revenue account of the State governments, GFD as percentage to GDP

is budgeted to be higher at 3.2 per cent in 2009-10 as compared with 2.6 per cent in 2008-09 (RE) and

1.5 per cent in 2007-08 (Accounts).

• The debt-GDP ratio of State governments declined to 26.2 per cent in 2008-09 (RE) from the peak level

of 32.8 per cent as on March 2004.

• States have started implementing the recommendations of the Sixth Central/States’ Own Pay

Commissions. Although, the States’ consolidated revenue surplus declined during 2008-09 (RE), it is

widely perceived that States are in a better position to absorb the impact of implementation of Pay

Commission awards.

• Compression in consolidated expenditure of State governments can be observed during 2005-10 period

mainly on account of some rationalisation of revenue expenditure during the fiscal responsibility legislation

(FRL) period. This is evident from decline in RE-GDP ratio from an average level of 13.3 per cent during

2000-05 to 12.4 per cent during 2005-10.

• The Study discusses various contemporary issues relating to finances of State governments, viz., revenue

augmentation, quality of expenditure, strengthening of rule based framework, fiscal transparency, surplus

cash balances, impact of stimulus programmes and implementation of awards of the Pay Commissions.

The Study has been prepared in the Division of State and Local Finances (DSLF) of the Department

of Economic Analysis and Policy (DEAP) under the overall direction of Shri. Deepak Mohanty, Executive

Director and under the guidance and supervision of Shri B.M. Misra, Adviser, by a team comprising

Smt. R. Kausaliya, Director, Shri. A. Karunagaran and Shri Rajeev Jain, Assistant Advisers, Shri Dhirendra

Gajbhiye and Shri Dirghau Keshao Raut, Research Officers. Shri A.K. Dharampal, Shri T.R. Muralidharan,

Shri P.P. Joshi, Shri B.A. Rankhambe and Smt. E. Fernandes provided support in compilation of data.

DSLF has also received support from the Regional Offices of DEAP and the Division of Central Finances.

Support was also received from Department of Government and Bank Accounts (DGBA) and Internal Debt

Management Department (IDMD) of the Reserve Bank. The Study benefited from the cooperation and

insights received from Finance Departments of the State Governments and valuable technical inputs received

from Ministry of Finance, Government of India and Planning Commission and Office of the Comptroller and

Auditor General (CAG) of India, New Delhi.

Starting with 2001-02, the Study is also available on RBI’s website (www.rbi.org.in). The earlier issues of

the above Study (since 1950-51 onwards) are available in the Central Library of Reserve Bank at Mumbai.

In order to improve the quality of the Study, feedback/comments on this Study are solicited. These may be

sent to Director, Division of State and Local Finances, Department of Economic Analysis and Policy, Reserve

Bank of India, Shahid Bhagat Singh Road, Mumbai 400 001 or through email at deapdslf@rbi.org.in.

Subir Gokarn

Deputy Governor

February 22, 2010

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CONTENTS

Page No.

Foreword

List of Abbreviations

Chapter I : Overview

1. Introduction ................................................................................................................................ 1

2. Preview ...................................................................................................................................... 2

Chapter II : Policy Initiatives

1. Introduction ................................................................................................................................ 4

2. State Governments .................................................................................................................... 4

3. Government of India .................................................................................................................. 9

4. Reserve Bank of India ............................................................................................................... 11

5. Conclusion ................................................................................................................................. 12

Chapter III: Consolidated Fiscal Position of State Governments

1. Introduction ................................................................................................................................ 13

2. Accounts: 2007-08 ..................................................................................................................... 14

3. Revised Estimates: 2008-09 ...................................................................................................... 15

4. Budget Estimates: 2009-10 ....................................................................................................... 17

5. Assessment ............................................................................................................................... 32

6. Conclusion ................................................................................................................................. 38

Chapter IV: State-Wise Analysis of Fiscal Performance

1. Introduction ................................................................................................................................ 39

2. Deficit Indicators of the State Governments .............................................................................. 39

3. Revenue Account of the State Governments ............................................................................ 46

4. Expenditure Pattern of the State Governments ......................................................................... 55

5. Conclusion ................................................................................................................................. 58

Chapter V: Outstanding Liabilities, Market Borrowings and Contingent Liabilities of

State Governments

1. Introduction ................................................................................................................................ 59

2. Outstanding Liabilities ................................................................................................................ 60

3. State-wise Debt Position............................................................................................................ 62

4. Market Borrowings ..................................................................................................................... 63

5. Liquidity Position and Cash Management ................................................................................. 65

6. Contingent Liabilities .................................................................................................................. 66

7. Assessment of Debt Position of State Governments ................................................................ 67

8. Investment of Cash Balances .................................................................................................... 69

9. Debt Consolidation and Relief ................................................................................................... 69

10. Conclusion ................................................................................................................................. 70

Chapter VI: Expenditure of State Governments : Trend and Composition

1. Introduction ................................................................................................................................ 72

2. Overall Trend ............................................................................................................................. 73

3. Revenue Expenditure ................................................................................................................ 74

4. Capital Expenditure ................................................................................................................... 78

5. State-wise Analysis of Expenditure ........................................................................................... 82

6. Conclusion ................................................................................................................................. 86

Chapter VII: Issues and Perspectives

1. Introduction ................................................................................................................................ 87

2. Revenue Augmentation ............................................................................................................. 87

3. Quality of Expenditure ............................................................................................................... 88

4. Strengthening of Rule Based Framework.................................................................................. 88

5. Fiscal Transparency .................................................................................................................. 89

6. Surplus Cash Balances ............................................................................................................. 89

7. Impact of slowdown on State Finances and Fiscal Stimulus Programmes............................... 89

8. Implementation of Sixth Central / State’s Own Pay Commission ............................................. 90

ANNEX 1

1. Major Policy Initiatives of State Budgets 2009-10……………………………………………………… 92

Explanatory Note on Data Sources and Methodology ........................................................................ 116

LIST OF BOXES

II.1 Climate Change and Initiatives at the State Level ........................................................................... 7

III.1 Role of Automatic Fiscal Stabilisers at the State level .................................................................... 17

III.2 Fiscal Stimulus measures at the Sub-National level: A Cross-Country Perspective ...................... 18

III.3 Fiscal Stimulus Measures at State Government Level in India ....................................................... 19

III.4 Goods and Services Tax in India – The present Status .................................................................. 24

Page No.

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III.5 Implementation of Sixth Central Pay Commission (CPC)/States' Pay Commissions (SPCs)Recommendations and State Governments' Finances ............................................................... 33

IV.1 Fiscal Transparency in the State Budgets ....................................................................................... 42

V.1 Surplus Cash Balance of the State Governments: Issues and Challenges .................................... 70

VI.1 Convergence in the composition of Major Categories of Expenditures across States ................... 85

LIST OF TABLES

II.1. Institutional Reforms by State Governments ................................................................................... 8

III.1. Major Deficit Indicators of State Governments ................................................................................ 13

III.2 Variation in Major Items – 2007-08 (Accounts) over 2007-08 (RE) ................................................. 14

III.3 Variation in Major Items – 2008-09 (RE) over 2008-09 (BE) ........................................................... 16

III.4 Variation in Major Items – 2009-10 (BE) over 2008-09 (RE) ........................................................... 21

III.5 Aggregate Receipts of State Governments ..................................................................................... 22

III.6 Cost Recovery of Select Services ................................................................................................... 25

III.7 Expenditure Pattern of State Governments ..................................................................................... 28

III.8 Development Expenditure vis-a-vis Total Expenditure .................................................................... 29

III.9 Trend in Aggregate Social Sector Expenditure of State Governments ........................................... 30

III.10 Trend in Composition of Social Sector Expenditure ........................................................................ 30

III.11 Expenditure on Social Services (Revenue and Capital Accounts) - Composition .......................... 31

III.12 Administrative Expenditure of State Governments – Wages and Salaries andOperations and Maintenance ........................................................................................................... 32

III.13 Trends in Major Deficit Indicators of State Governments ................................................................ 34

III.14 State-wise Correction of RD and GFD – 2009-10 (BE) over 2008-09 (RE) .................................... 35

III.15 Decomposition and Financing Pattern of Gross Fiscal Deficit – 2007-08 (Accounts)to 2009-10 (BE) ................................................................................................................................ 35

III.16 Budgetary Data Variation – State Budgets and Union Budget ........................................................ 36

III.17 Financing of Gross Fiscal Deficit (GFD) – 2009-10 (Adjusted) ....................................................... 37

IV.1 Deficit Indicators of State Governments .......................................................................................... 40

IV.2 Revenue Receipts of the State Governments ................................................................................. 47

IV.3 Revenue Expenditure of the State Governments ............................................................................ 48

IV.4 Expenditure Pattern of State Governments ..................................................................................... 56

V.1 Outstanding Liabilities of State Governments (As at end-March) ................................................... 60

V.2 Composition of Outstanding Liabilities of State Governments (As at end-March) .......................... 61

V.3 Debt Indicators of State Governments ............................................................................................ 62

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Page No.

V.4 Interest Rate Profile of the Outstanding Stock ofState Government Securities (As at end-March) ............................................................................. 64

V.5 Market Borrowings of State Governments ....................................................................................... 64

V.6 Weighted Average Yield of State Government Securities ............................................................... 65

V.7 Normal WMA Limits - 1996 to 2009 ................................................................................................. 65

V.8 Outstanding Guarantees of State Governments ............................................................................. 66

V.9 Average Interest Rate on Outstanding Liabilities of State Governments ........................................ 67

V.10 Maturity Profile of Outstanding State Government Securities (As at end-March 2009) .................. 68

V.11 Maturity Profile of Outstanding State Loans and Power Bonds (As at end-March 2009) ............... 69

VI.1 Trend in Expenditure of the State Governments ............................................................................. 73

VI.2 Composition of Aggregate Expenditure of the State Governments ................................................ 74

VI.3 Composition of Revenue Expenditure ............................................................................................. 76

VI.4 Committed Expenditure and its Composition .................................................................................. 76

VI.5 Trend in Interest Payments of State Governments ......................................................................... 77

VI.6 Composition of Development Expenditure ...................................................................................... 80

LIST OF CHARTS

III.1 Major Deficit Indicators .................................................................................................................... 20

III.2 Cyclical Behaviour of Sales tax/VAT Collections and Nominal GDP .............................................. 23

III.3 Cost Recovery of Select Services(Ratio of Non-Tax Revenue to non-Plan Revenue Expenditure) .................................................... 26

III.4 Expenditure on Interest Payments, Pension and Administrative Services ...................................... 26

III.5 Major Components of Capital Receipts ........................................................................................... 27

III.6 Development and Non-Development Expenditure .......................................................................... 28

III.7 Trend in Social Sector Expenditure ................................................................................................. 29

III.8 Trend in Major Deficit Indicators ...................................................................................................... 34

IV.1 Revenue Deficit (+)/Surplus (-) of non-Special Category States ..................................................... 43

IV.2 Gross Fiscal Deficit of non-Special Category States ....................................................................... 44

IV.3 Financing of Interest payments by Primary Revenue Surplus in non-Special Category States ..... 44

IV.4 Revenue Deficit (+)/Surplus (-) of Special Category States ............................................................ 45

IV.5 Gross Fiscal Deficit of Special Category States .............................................................................. 45

IV.6 Financing of Interest Payments by Primary Revenue Surplus in Special Category States ............ 46

IV.7 Variation in Own Revenue (OR) and Central Transfers (CT) in 2008-09 (RE)over 2005-08 (Avg.) - Non-Special Category States ....................................................................... 49

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IV.8 Own Tax Revenue of non-Special Category States ........................................................................ 49

IV.9 Own non-Tax Revenue of non-Special Category States ................................................................. 49

IV.10 Value Added Tax in non-Special Category States during the period (2007-08 to 2009-10) ........... 50

IV.11 Variation in Development and Non-Development Revenue Expenditure in2008-09 (RE) over 2005-08 (Avg.) - non-Special Category States ................................................. 50

IV.12 Composition of Interest Payments in non-Special Category States - 2008-09 (RE) ....................... 51

IV.13 Pre-emption of Revenue Receipts by Interest Payments and CommittedExpenditure in non-Special Category States - 2008-09 (RE) .......................................................... 52

IV.14 Variation in Own Revenue (OR) and Central transfers (CT) in 2008-09 (RE) over2005-08 (Avg.) - Special Category States ....................................................................................... 52

IV.15 Own Tax Revenue of Special Category States ............................................................................... 53

IV.16 Own non-Tax Revenue of Special Category States ........................................................................ 53

IV.17 Value Added Tax in Special Category States .................................................................................. 53

IV.18 Variation in Development and non-Development Expenditure in 2008-09 (RE)over 2005-08 (Avg.) - Special Category States ............................................................................... 54

IV.19 Composition of Interest Payments in Special Category States - 2008-09 (RE) .............................. 54

IV.20 Pre-emption of Revenue Receipts by Interest Paymentsin Special Category States - 2008-09 (RE) ..................................................................................... 55

IV.21 Development Expenditure of non-Special Category States ............................................................ 56

IV.22 Social Sector Expenditure of non-Special Category States ............................................................ 56

IV.23 Capital Outlay of non-Special Category States ............................................................................... 57

IV.24 Development Expenditure of Special Category States ................................................................... 57

IV.25 Social Sector Expenditure of Special Category States.................................................................... 57

IV.26 Capital outlay of Special Category States ....................................................................................... 58

V.1 Deficit, Debt and Interest Burden..................................................................................................... 60

V.2 Composition of Outstanding Liabilities of State Governments (As at end-March) .......................... 61

V.3 Debt-GSDP-Non-Special Category States ...................................................................................... 63

V.4 Debt-GSDP-Special Category States .............................................................................................. 63

V.5 Utilisation of WMA and Overdraft by States .................................................................................... 65

V.6 Investments in 14-day Intermediate and Auction Treasury Bills by State Governments ................ 69

VI.1 Trends in Aggregate Expenditure by State Governments ............................................................... 73

VI.2 Composition of Expenditure of State Governments ........................................................................ 74

VI.3 Composition of Revenue Expenditure: Development vis-a-vis Non-Development ......................... 75

VI.4 Share of Social and Economic Services in Total Development Revenue Expenditure .................. 75

VI.5 Committed Expenditure as percentage of Revenue Expenditure ................................................... 77

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VI.6 Trend in Composition of Committed Expenditure of State Governments ....................................... 77

VI.7 Trend in Interest Payments .............................................................................................................. 78

VI.8 Composition of Interest Payments ................................................................................................... 78

VI.9 Trends in Capital Outlay .................................................................................................................. 79

VI.10 Share of Capital Outlay in Total Expenditure and Capital Expenditure ........................................... 79

VI.11 Share of Development and Non-Development Expenditure ........................................................... 80

VI.12 Development and Non-Development Expenditure (As percentage of GDP) .................................. 81

VI.13 Share of Social and Economic Services in Development Expenditure ........................................... 81

VI.14 Trend in Social Sector Expenditure ................................................................................................. 81

VI.15 Size of State Government Expenditure ........................................................................................... 82

VI.16 (A) Weighted Coefficient of Variation in Per Capita Capital Outlay across States ......................... 86

VI.16 (B) Weighted Coefficient of Variation in Per Capita Development Expenditure across States ...... 86

VI.16 (C) Social Sector Expenditure: Weighted Coefficient of Variation across States ........................... 86

VI.16 (D) Weighted Coefficient of Variation in Per Capita Expenditure on Health ................................... 86

VI.16 (E) Weighted Coefficient of Variation in Per Capita Expenditure on Rural Development .............. 86

VI.16 (F) Weighted Coefficient of Variation in Per Capita Expenditure on Education .............................. 86

LIST OF APPENDIX TABLES

1 Major Deficit Indicators of State Governments ................................................................................ 121

2 Consolidated Budgetary Position at a Glance ................................................................................. 122

3 Revenue Receipts ............................................................................................................................ 123

4 Revenue Expenditure ...................................................................................................................... 124

5 Capital Receipts ............................................................................................................................... 125

6 Capital Disbursements ..................................................................................................................... 126

7 Devolution and Transfer of Resources from the Centre .................................................................. 127

8 Development and Non-Development Expenditure .......................................................................... 128

9 Development Expenditure - Major Heads ........................................................................................ 129

10 Non-Development Expenditure - Major Heads ................................................................................ 130

11 Development and Non-Development Expenditure - Plan and Non-Plan Components ................... 131

12 Development and Non-Development Expenditure - Revenue and Capital Components ............... 132

13 Plan and Non-Plan Expenditure - Revenue and Capital Components ............................................ 133

14 Non-Plan Non-Development Expenditure of States ........................................................................ 134

15 Composition of Social Sector Expenditure ...................................................................................... 135

16 Decomposition of Gross Fiscal Deficit ............................................................................................. 137

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17 Financing of Gross Fiscal Deficit ..................................................................................................... 138

18 Financing of Gross Fiscal Deficit - As per cent to Total .................................................................. 139

19 Composition of Outstanding Liabilities of State Governments (As at end-March) .......................... 140

20 Composition of Outstanding Liabilities of State Governments – As proportion to Total(As at end-March) ............................................................................................................................ 141

21 State Government Market Borrowings............................................................................................. 142

22 Composition of Capital Expenditure of States ................................................................................. 143

23 Major Components of Social Sector Expenditure ............................................................................ 144

LIST OF STATEMENTS

1. Major Fiscal Indicators ..................................................................................................................... 147

2. Revenue Deficit/Surplus .................................................................................................................. 149

3. Conventional Deficit/Surplus ............................................................................................................ 150

4. Gross Fiscal Deficit/Surplus ............................................................................................................. 151

5. Decomposition of Gross Fiscal Deficit ............................................................................................. 152

6. Financing of Gross Fiscal Deficit - 2007-08 (Accounts) .................................................................. 153

7. Financing of Gross Fiscal Deficit - As per cent to Total - 2007-08 (Accounts) ................................ 154

8. Financing of Gross Fiscal Deficit - 2008-09 (RE) ............................................................................ 155

9. Financing of Gross Fiscal Deficit - As per cent to Total - 2008-09 (RE) ......................................... 156

10. Financing of Gross Fiscal Deficit - 2009-10 (BE) ............................................................................ 157

11. Financing of Gross Fiscal Deficit - As per cent to Total - 2009-10 (BE) .......................................... 158

12. Development Expenditure................................................................................................................ 159

13. Non-Development Expenditure ........................................................................................................ 160

14. Plan Expenditure .............................................................................................................................. 161

15. Non-Plan Expenditure ...................................................................................................................... 162

16. Non-Plan Non-Development Expenditure........................................................................................ 163

17. Interest Payments ............................................................................................................................ 164

18. Tax Revenue .................................................................................................................................... 165

19. Own Tax Revenue ........................................................................................................................... 166

20 Non-Tax Revenue ........................................................................................................................... 167

21. Own Non-Tax Revenue ................................................................................................................... 168

22. Share in Central Taxes .................................................................................................................... 169

23. Grants from the Centre .................................................................................................................... 170

24. Loans from the Centre ..................................................................................................................... 171

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25. Devolution and Transfer of Resources from the Centre .................................................................. 172

26. Composition of Outstanding Liabilities (As at end-March 2004 to 2010) ........................................ 173

27. Total Outstanding Liabilities of State Governments (As at end-March) .......................................... 180

28. Total Outstanding Liabilities of State Governments As percentage of GSDP(As at end-March) ............................................................................................................................ 181

29. Market Borrowings of State Governments ....................................................................................... 182

30. Plan Outlay of State Governments .................................................................................................. 183

31. Capital Receipts and Capital Expenditure ....................................................................................... 184

32. State Government Market Loans ..................................................................................................... 185

33. Outstanding Market Loans of State Governments (As at end-March 2009) ................................... 205

34. Maturity Profile of Outstanding State Government Securities(Outstanding as on March 31, 2009) ............................................................................................... 206

35. Maturity Profile of Outstanding State Government Securities -As Percentage to total (Outstanding as on March 31, 2009) .......................................................... 207

36. Select Committed Expenditure of State Governments - As Ratio to States’ Own Revenue ........... 208

37. Select Committed Expenditure of State Governments - As Ratio to Revenue Expenditure ........... 209

38. Availment of WMA and Overdraft from the Reserve Bank .............................................................. 210

39. Ways and Means Advances from the Centre .................................................................................. 211

40. Investment Outstanding in 14-days Intermediate Treasury Bills (As at end-March) ....................... 212

41. Expenditure on Education - As Ratio to Aggregate Expenditure ..................................................... 213

42. Expenditure on Medical and Public Health and Family Welfare -As Ratio to Aggregate Expenditure ................................................................................................. 214

43. Outstanding Guarantees of State Governments (As at end-March) ............................................... 215

44. Expenditure on Wages and Salaries ............................................................................................... 216

45. Expenditure on Operations and Maintenance ................................................................................. 217

46. Social Sector Expenditure ................................................................................................................ 218

47. Social Sector Expenditure to Total Expenditure .............................................................................. 219

48. Debt/Interest Relief availed by eligible States under DCRF recommended by TFC....................... 220

49. State-wise Trend in Total Expenditure ............................................................................................. 221

50. State-wise Trend in Revenue Expenditure ...................................................................................... 222

51. State-wise Trend in Capital Outlay .................................................................................................. 223

52. State-wise Trend in Per-Capita Capital Outlay ................................................................................ 224

53. State-wise Trend in Development Expenditure ............................................................................... 225

54. State-wise Trend in Development Expenditure as per cent of Total Expenditure ........................... 226

55. State-wise Trend in Per Capita Development Expenditure ............................................................. 227

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56. State-wise Trend in Social Sector Expenditure ............................................................................... 228

57. State-wise Trend in Per Capita Social Sector Expenditure ............................................................. 229

APPENDICES

I. Revenue Receipts of States and Union Territories with Legislature ............................................... 233

II. Revenue Expenditure of States and Union Territories with Legislature .......................................... 265

III. Capital Receipts of States and Union Territories with Legislature .................................................. 327

IV. Capital Expenditure of States and Union Territories with Legislature ............................................. 343

NOTES TO APPENDICES ........................................................................................................................ 436

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x

AD - Aggregate Disbursements

AFS - Annual Financial Statement

AIIMS - All India Institute of MedicalScience

AR - Aggregate Receipts

ATBs - Auction Treasury Bills

Avg. - Average

BE - Budget Estimates

BIFR - Bureau for Industrial Finance andRestructuring

BOT - Build Operate Transfer

BPL - Below Poverty Line

BRIMSTOWA - Brihan Mumbai Storm WaterDrainage Project

CAG - Comptroller and Auditor General ofIndia

CARG - Compound Annual Rate of Growth

CCIL - Clearing Corporation of IndiaLimited

CE - Capital Expenditure

CGA - Controller General of Accounts

CHCs - Community Health Centers

CENVAT - Central Value Added Tax

CLU - Change of Land Use

CO - Capital Outlay

Comm. Exp. - Committed Expenditure

CPA - Central Plan Assistance

CPC - Central Pay Commission

CPS - Central Plan Schemes

CPSUs - Central Public Sector Undertakings

CR - Capital Receipts

CRR - Cash Reserve Ratio

CRF - Calamity Relief Fund

CSF - Consolidated Sinking Fund

CSO - Central Statistical Organisation

CPC - Centralised Processing Centre/Central Sixth Pay Commission

CSS - Centrally Sponsored Schemes

CST - Central Sales Tax

CT - Current Transfers

DA - Dearness Allowance

DCO - Developmental Capital Outlay

DCRF - Debt Consolidation and ReliefFacility

DEAP - Department of Economic Analysisand Policy

DGBA - Department of Government andBank Accounts

Dev. Exp. - Developmental Expenditure

DoE - Department of Economics

DRE - Development Revenue Expenditure

DSLF - Division of State and LocalFinances

DSS - Debt Swap Scheme

DT - Direct Taxes

EAPs - Externally Aided Projects

EDC - External Development Charges

EEC - European Economic Community

ED - Education

EFC - Eleventh Finance Commission

EME - Emerging Market Economies

ES - Economic Services

List of Abbreviations

xi

F&WL - Forestry and Wild Life

FIs - Financial Institutions

FRBM - Fiscal Responsibility and BudgetManagement

FRL - Fiscal Responsibility Legislation

GDP - Gross Domestic Product

GFD - Gross Fiscal Deficit

GFD Exp. - Gross Fiscal Deficit Expenditure

GFS - Government Finance Statistics

GIA - Grants-in-Aid

GIC - General Insurance Corporation ofIndia

GIS - Geographic Information System

GoI - Government of India

GLFC - Gross Loans from Centre

GRF - Guarantee Redemption Fund

GS - General Services

GSDP - Gross State Domestic Product

GST - Goods and Services Tax

HE - Housing Expenditure

HSN - Harmonised System ofNomenclature

IAY - Indira Awaas Yojana

ICDS - Integrated Child DevelopmentServices

ICUs - Intensive Care Units

IDMD - Internal Debt ManagementDepartment

IDT - Indirect Taxes

IIFCL - India Infrastructure FinanceCompany Limited

IIMs - Indian Institute of Managements

IISER - Indian Institute of ScienceEducation and Research

IIT - Indian Institute of Technology

IMF - International Monetary Fund

IP - Interest Payments

IR - Interest Receipts

IT - Information Technology

ITBs - Intermediate Treasury Bills

JBIC - Japan Bank for InternationalCo-operation

JNNURM - Jawaharlal Nehru National UrbanRenewal Mission

JWG - Joint Working Group

LFC - Loans from Centre

LIC - Life Insurance Corporation of India

LBs - Local Bodies

LR - Land Revenue

ML - Market Loan

MoF - Ministry of Finance

MoU - Memorandum of Understanding

MSMEs - Micro, Small and MediumEnterprises

MTFP - Medium Term Fiscal Plan

NABARD - National Bank for Agriculture andRural Development

NAIS - National Agriculture InsuranceScheme

NCDC - National Co-operativeDevelopment Corporation

NAPCC - National Action Plan on ClimateChange

NCT Delhi - National Capital Territory of Delhi

NDRE - Non-Development RevenueExpenditure

NDS-OM - Negotiated Dealing System -Order Matching Segment

NGOs - Non-Governmental Organisations

NHB - National Housing Bank

xii

NIRE - Non-Interest Revenue Expenditure

Non-Dev.Exp.- Non-Developmental Expenditure

NPS - New Pension Scheme

NSSF - National Small Savings Fund

OBCs - Other Backward Classes

OD - Overdraft

OECF - Overseas Economic CooperationFund

ONTR - Own Non-Tax Revenue

OR - Own Revenue

OTR - Own Tax Revenue

PC - Planning Commission

PCCO - Per Capita Capital Outlay

PD - Primary Deficit

PDS - Public Distribution System

PERC - Public Expenditure ReviewCommittee

PF - Provident Fund

PFM - Public Finance Management

PHCs - Primary Health Centers

PMGSY - Pradhan Mantri Gram Sadak Yojana

PMAGY - Pradhan Mantri Adarsh GramYojana

PN - Pension

PPP - Public Private Partnership

PRB - Primary Revenue Balance

PRIs - Panchayati Raj Institutions

PRS - Primary Revenue Surplus

PSUs - Public Sector Undertakings

RAJSWAN - Rajasthan State-wide Area Network

RAY - Rajiv Awas Yojana

RBI - Reserve Bank of India

RCDP - River Course Development Project

RD - Revenue Deficit/RuralDevelopment

RE - Revised Estimates

REC - Rural Electrification Corporation

Rev. Exp. - Revenue Expenditure

RGGVY - Rajiv Gandhi Grameen VidyutikaranYojana

RIDF - Rural Infrastructure DevelopmentFund

RKVY - Rashtriya Krishi Vikas Yojana

RLA - Recovery of Loans and Advances

RR - Revenue Receipts

RSBY - Rashtriya Swasthya Bima Yojna

SBI - State Bank of India

SCs - Scheduled Castes

SCT - Share in Central Taxes

SDLs - State Development Loans

SEBs - State Electricity Boards

SEZs - Special Economic Zones

SFCs - State Finance Commissions

SGE - State Government Expenditure

SGSY - Swarna Jayanti Gram SwarozgarYojna

SHGs - Self-Help Groups

SIDBI - Small Industries Development Bankof India

SPC - State’s own Pay Commission

SPF - State Provident Fund

SPVs - Special Purpose Vehicles

SRF - Stamps and Registration Fees

SS - Social Services

SSA - Sarva Shiksha Abhiyan

SSE - Social Sector Expenditure

SST - State Sales Tax

ST - Scheduled Tribe

SUCCESS - Scheme for Universal Access andQuality at Secondary Stage

xiii

TBs - Treasury Bills

TCS - Taxes on Commodities and Services

TE - Total Expenditure

ThFC - Thirteenth Finance Commission

TwFC - Twelfth Finance Commission

TI - Taxes on Income

TP - Taxes on Property and CapitalTransactions

TPT&E - Taxes on Professions, Trade,Callings and Employment

TR - Tax Revenue

TV - Taxes on Vehicles

UNFCCC - United Nations FrameworkConvention on Climate Change

UPSC - Union Public Service Commission

USA - United States of America

USAID - United States Agency forInternational Development

UTs - Union Territories

VAT - Value Added Tax

VGF - Viability Gap Funding

WCV - Weighted Coefficient of variation

WMA - Ways and Means Advances

1. Introduction

1.1 The period up to 2007-08 witnessed aconsiderable improvement in the consolidated fiscalposition of State governments. States were givenincentives by the Twelfth Finance Commission(TwFC) to implement their own Fiscal ResponsibilityLegislation (FRL) in the form of conditional debtrestructuring and interest rate relief. However, theeconomic slowdown following the knock-on effectof the global financial crisis and the accompanyingmoderation in the pace of revenue growth adverselyaffected the finances of the States in 2008-09.

1.2 This study on ‘State Finances: A Study ofBudgets of 2009-10’1 has been prepared basedon the data available in the budget documents of28 States governments, and other sources. TheState governments presented their budgets for2009-102 in an environment marked by anuncertain growth scenario. It is evident that thetax revenue buoyancy achieved till 2007-08 could

The State governments formulated their budgets for 2009-10 against the background of the knock-oneffect of the global financial crisis on the Indian economy. Taking cognizance of uncertain growth prospects,many State governments announced fiscal stimulus packages to sustain the growth momentum. In thiscontext the fiscal correction and consolidation witnessed in State finances in the recent past provided thefiscal space for the stimulus. Consequently, the overall Gross Fiscal Deficit (GFD)-GDP ratio is estimatedto increase to 3.2 per cent in 2009-10 (Budget Estimates) from 2.6 per cent in 2008-09 (RevisedEstimates) and 1.5 per cent in 2007-08 (Accounts). As the recovery process sets in, the States need toreturn to the path of fiscal consolidation.

OverviewI

1 Prepared by the Division of State and Local Finances (DSLF) of the Department of Economic Analysis and Policy (DEAP) with supportfrom the Division of Central Finances and the Regional Offices of DEAP. Support was also received from the Department of Governmentand Bank Accounts (DGBA) and the Internal Debt Management Department (IDMD) of the Reserve Bank. Technical support wasreceived from the finance departments of the twenty-eight State governments, governments of NCT Delhi and Puducherry; valuableinputs were also received from the Ministry of Finance, Government of India, Planning Commission and the office of Comptroller andAuditor General (CAG) of India, New Delhi. All these are thankfully acknowledged.

2 An analysis of the consolidated fiscal position of State governments based on State budgets of twenty-seven (of which two were Vote onAccount) States for 2009-10 has been published in the Reserve Bank of India Annual Report, 2008-09. This Study provides furtherdetails on the consolidated fiscal position of twenty-eight State governments as also a State-wise analysis covering budgetary data aswell as additional information obtained from the State governments and the Government of India. Information with respect to NCT Delhiand Puducherry is provided additionally as memo item.

1

not be realised during 2008-09 (RE). States mayalso be under pressure to increase expenditureto boost demand in the economy. In addition, theimpact of the implementation of the Sixth CentralPay Commission (CPC)/State Own PayCommissions (SPCs) by many State governmentshad implications for their revenue expenditureduring 2008-09 (RE) and 2009-10 (BE). In short,the pace of fiscal correction and consolidationwitnessed during the recent past is likely to suffera setback.

1.3 States, while presenting their budgets for2009-10, seem to have taken into account the likelyimpact of a slowdown in their tax collections andCentral transfers. In order to deal with theslowdown, a few State governments announceddedicated fiscal stimulus packages in order to boostdemand, while many other States announcedsector specific tax reductions. However, the focusof the additional expenditure in 2009-10 appears

State Finances : A Study of Budgets of 2009-10

2

to be through revenue expenditure as reflected inhigher revenue expenditure as a ratio to gross statedomestic product (GSDP) in many States, ratherthan capital expenditure. In fact, a majority of theState governments have budgeted a lower capitaloutlay as percentage to GSDP for 2009-10.

1.4 Recognising the need for reviving economicgrowth, the Government of India permitted the Stategovernments to borrow an additional 0.5 per cent oftheir GSDP by relaxing the fiscal deficit target underFRBM from 3.0 per cent to 3.5 per cent in 2008-09and further to 4 per cent of their GSDP in 2009-10.In the Union Budget 2009-10, it was announced thata goods and services tax (GST) would be introducedby April 1, 2010 after due consultations with allstakeholders. The implementation of GST ishowever, likely to be postponed to a future date. Inorder to facilitate the process of a furtherconvergence of central excise duty rates to a meanrate (currently 8 per cent), various policy measureswith regard to tax rates were proposed by reviewingthe list of items. The Reserve Bank in its role asbanker, debt manager and monetary authority hasalso been taking various initiatives to improve thefinancial condition of the State governments. A non-competitive bidding facility has been introduced toState Development Loans (SDLs) since the auctionheld on August 25, 2009.

2. Preview

1.5 A noticeable improvement in the financesof the State governments was discernible asrevised estimates of 2007-08 translated intoaccounts. This was reflected in an increase inrevenue surplus, reduction in GFD and primarydeficit turning into surplus. However, the significantimprovement in key deficit indicators of Stategovernments witnessed till 2007-08 appears tohave abated with the overall macroeconomicslowdown in 2008-09 and 2009-10.

1.6 The consolidated revenue surplus aspercentage to GDP increased from 0.6 per cent in2006-07 to 0.9 per cent in 2007-08. Although theStates were able to achieve revenue surplus in2008-09 (RE) as well, there was a significant

decline of 0.7 percentage points in the revenuesurplus-GDP ratio [from 0.9 per cent in 2007-08 to0.2 per cent in 2008-09 (RE)]. The consolidatedrevenue balance of the States, after remaining insurplus for three consecutive years, is however,budgeted to turn into deficit (0.5 per cent of GDP) in2009-10 (BE). Reflecting the deterioration in therevenue account of State governments, GFD aspercentage to GDP is estimated to be higher at 3.2per cent in 2009-10 as compared with 2.6 per centin 2008-09 (RE) and 1.5 per cent in 2007-08(Accounts). The increase in GFD in 2009-10 (BE)would be mainly due to deterioration in the revenueaccount coupled with an increase in net lending. Theconsolidated capital outlay as a percentage to GDP,however, is budgeted to decline in 2009-10 by 0.2percentage points to 2.6 per cent as compared with2008-09 (RE). The primary surplus generated byState governments in 2007-08 turned into primarydeficit (0.7 per cent of GDP) in 2008-09 (RE) whichwould further increase to 1.3 per cent in 2009-10.

1.7 During 2009-10, deterioration in theconsolidated fiscal position is observed acrossmajority of the States. Out of the 28 States, 14States have budgeted a revenue deficit in 2009-10as compared to 4 States both in 2008-09 (RE) and2007-08 (Accounts). Revenue account positionswith respect to 10 States are budgeted to turn intodeficit in 2009-10 (BE) from a surplus position in2008-09 (RE). Further, another nine States havebudgeted a lower revenue surplus as comparedwith 2008-09 (RE). In total, the revenue account isexpected to be adversely impacted in the case of23 States during 2009-10. Similarly, the number ofStates with the GFD-GSDP ratio of less than 3.0per cent decreased from 18 in 2007-08 (Accounts)to 9 in 2008-09 (RE) and further to 6 in 2009-10(BE). In short, out of 28 States, 22 States wouldnot be able to achieve a GFD-GSDP ratio of 3 percent in 2009-10 as indicated in their FRLs.

1.8 Given the targets with respect to key deficitindicators prescribed by the TwFC, it is observedthat at the consolidated level, the States were ableto achieve most of the targets well in advance ratherthan in the terminal year i.e., 2009-10. At theconsolidated level, State governments wiped out

3

Overview

revenue deficit in 2006-07 and were able to containGFD-GDP below 3 per cent in 2005-06. However,progress came to a halt when the impact of theoverall macroeconomic slowdown and theimplementation of the Sixth CPC/SPCs began toreflect in State finances in 2008-09. In 2009-10(BE), the consolidated State finances are likely todeteriorate further. An analysis of State budgetsshows that with the re-emergence of revenue deficitafter three years and the expansion in GFD to morethan 3.0 per cent of GDP, the States wouldapparently not be able to meet the TwFC targets inthe terminal year of 2009-10.

1.9 The outstanding l iabi l i t ies of Stategovernments, as a percentage to GDP, showed apersistent decline from the peak level of 32.8 percent in 2003-04 to 26.2 per cent in 2008-09 (RE).However, due to increasing financing needs, thedebt-GDP ratio is budgeted to be marginally higherat 26.5 per cent in 2009-10. Likewise, the ratio ofinterest payments to revenue receipts of the Stategovernments, which declined sharply from 26.0 percent in 2003-04 to 14.4 per cent in 2008-09 (RE),is estimated to be marginally higher at 14.5 per centin 2009-10 (BE).

1.10 Given the recent setback to State finances,there are a number of issues that States have tolook into. For instance, the States need to resumethe reform process towards fiscal consolidation inthe coming years. At the same time the States haveto ensure adequate growth enhancing expenditureso as to counter the downturn in the economy. TheStates need to successfully manage the transitionwith regard to the implementation of the Sixth CPC/

SPCs. In addition, there are certain structuralissues that continue to remain important for Statefinances such as the quality of expenditure andsurplus cash balances of State governments. Withexperience gathered through their FRLs, the Statesneed to plan the next round of reforms and resumethe process of fiscal correction and consolidationat the earliest.

1.11 The Chapter-wise scheme of the Study isas follows: Chapter I provides an overview of theStudy. Chapter II highlights major policy initiativesof State governments, the Government of India andof the Reserve Bank of India. Chapter III providesan assessment of the consolidated budgetaryposition of the State governments. Chapter IVbrings out the State-wise assessment of their fiscalperformance. Chapter V provides an analysis andassessment of the outstanding liabilities, includingmarket borrowings and contingent liabilities of theState governments. Chapter VI elaborates on thespecial theme, i.e., an analysis of the trend andpattern of expenditure of the States, covering theperiod 1980-81 to 2009-10. The major emergingissues relating to State finances are presented inChapter VII. Annex 1 sets out the State-wise majorpolicy initiatives announced in the State budgets.The consolidated data on various fiscal indicatorsof the twenty-eight State governments are set outin Appendix Tables 1-23, while State-wise data areprovided in Statements 1-57. The detailed State-wise budgetary data are provided in Appendices I-IV(Appendix I - Revenue Receipts, Appendix II -Revenue Expenditure, Appendix III – CapitalReceipts, Appendix IV - Capital Expenditure).

State Finances : A Study of Budgets of 2009-10

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1. Introduction

2.1 State budgets for 2009-10, with a focus oneconomic revival, announced a number of policyinitiatives aimed at directing expenditure towardswelfare and developmental activities. On thetaxation front, these measures include exemption/reduction in value added tax (VAT) and exciseduties on certain goods while on the expenditureside, higher allocation for various welfare schemes/infrastructure and release of Pay Commissionawards are proposed. Many States haveannounced that they will step up investments, moreparticularly on projects like irrigation, housing andother infrastructure projects like power generation,good road networks, airports and industrial parks.Recognising the fact that the industrial sector mustremain vibrant and growing, the States are alsotrying to attract private investment for the creationof infrastructure through the public-privatepartnership (PPP) mode. Detailed State-wise policyinitiatives are set out in Annex. This Chapter brieflydiscusses policy initiatives and schemes that havebeen proposed by the State governments, theGovernment of India and the Reserve Bank of India.

2. State Governments

2.2 Proposals/initiatives announced in theStates budgets for 2009-10 cover areas such as

revenue augmentation, expenditure measures,institutional measures and other major policyinitiatives.

Revenue Measures

2.3 The overall slowdown in economic activityis likely to have adverse implications on the overallrevenue augmentation of States both in terms oftheir own tax revenues as well as devolution fromthe Centre. In view of this, most of the States havetaken proactive measures to streamline revenuegeneration at the State level and also simplifiedthe procedures in general. The simplif iedprocedures include rules, inspections, registrationsand the introduction of the single window clearancesystem for industries and businesses to carry ontheir operations (Andhra Pradesh andMaharashtra). As a part of fiscal stimulus measureson taxation, the States have reduced the rate ofstamp duty on sale of land/property in urban andrural areas (Haryana, Rajasthan, Uttarakhand andKerala). In order to encourage tax compliance, VAThas been reduced on a number of items by most ofthe States. Besides increasing tax compliance, theother measures include early VAT refunds,recovery of profession tax, reduction in penaltyunder VAT, relief to hotel dealers under VAT,extension of exemption on food grains and

In the backdrop of moderation in economic activity as a fallout of the global financial crisis, State governmentshave announced a number of policy initiatives in their budgets for 2009-10. Emphasis has been accordedto the generation of employment, restructuring of Public Distribution System (PDS) and tax exemptions/reductions besides giving priority to creating more opportunities/assistance to entrepreneurs in terms ofimprovement in industrial infrastructure. With the Union Government allowing the States to enhancethe ceiling of fiscal deficit to tide over the present difficult circumstances, the States may utilise theadditional fiscal space for making capital investments for development. State governments, the Governmentof India and the Reserve Bank of India have also announced a number of policy measures such as higherallocation for various projects like irrigation, housing and infrastructure, the release of Pay Commissionawards, introduction of non-competitive bidding in the auction of State Development Loans (SDLs)and embedded derivative options in the issuance of SDLs which would have an impact on State finances.

Policy InitiativesII

4

5

reduction/rationalisation of luxury tax in Goa,Rajasthan, NCT Delhi and Karnataka. Furthermore,to streamline and improve the quality of services,complete e-filing of returns/computerisation of thesales tax departments have been implemented inKerala and Uttarakhand. To compensate the lossof revenue through tax reductions/exemptionsunder the fiscal stimulus package, the measurestaken by the State governments include: (i) a newscheme of ‘one time settlement’ of tax arrears forpending under-valuation with respect to stamp dutycases in Kerala; (ii) broadening the tax net toinclude petty dealers in Kerala; and (iii) installationof water supply meters in Nagaland. To disclosesuppressed turnover and to pay taxes thereon, the‘Voluntary Disclosure Scheme’ has also beenannounced in Kerala. The Punjab government hasformulated a comprehensive policy prescribingcollection of External Development Charges(EDCs), License/Permission Fee and Change ofLand Use (CLU) charges to generate sufficientrevenues to provide ultra modern urbaninfrastructure. In Delhi, a major initiative was takento reform the excise duty structure. Accordingly anew bill will be introduced which will incorporate asimplified duty structure.

Expenditure Measures

2.4 In the backdrop of moderation in economicactivities, many States have initiated fiscal stimuluspackages to get the economy going by continuingall developmental and welfare programmes. In thiscontext, the Central Government has allowed theStates to raise the GFD limit up to 4 per cent ofGSDP during 2009-10 in order to make more fundsavailable to revive the growth process.

2.5 Agriculture and allied activities havereceived top priority with a plethora of incentives,write-offs and concessions, support for organicfarming and free power to farmers (AndhraPradesh, Tamil Nadu, Karnataka, Kerala,Puducherry, Orissa, Maharashtra and WestBengal). The initiatives are focused on irrigationprojects, particularly, minor irrigation (Meghalaya)and providing fertilisers, seeds and pesticides atsubsidised rates (Orissa). The other initiatives

include insurance schemes for crops (HimachalPradesh and Tamil Nadu), setting up of ‘Agriclinics’in Tamil Nadu, adopting a village as a ‘ModelVillage’, developing an Agri–HUB and Agri-Processing Zone under Public Private Partnership(PPP) arrangement in Assam, ‘Bio-Villages’ in WestBengal, providing direct computer connectivity andestablishing an ‘Agriculture Knowledge Center’ inMadhya Pradesh, debt relief scheme for farmersin Maharashtra and free power to farmers in someStates. Some of the other measures include dairydevelopment and milk production (Tripura, WestBengal, Tamil Nadu and Puducherry) and a novelscheme of a ‘Land Bank’ where land purchasedfrom the farmers at market prices is resold forindustrial use in West Bengal.

2.6 Recognising the fact that the industrialsector must remain vibrant and growing, specialfocus has been given to identifying a large pool ofland having access to National Highways, buildingSpecial Economic Zones (SEZs) and industrialestates and making these available fordevelopment of industry through the PPP mode inmany States. Almost all the States have announcedpolicy measures to upgrade their overal linfrastructure and West Bengal and Punjab haveaccorded priori ty to the development ofinfrastructure for clusters of industries in the smallscale sector so that new small scale units candevelop alongside traditional industries. SomeStates have proposed a ‘New Industrial Policy’(Rajasthan) while others are in the process(Meghalaya), Industrial Model Towns (Haryana)and ‘Economic Hubs’ in select places. In order toaugment their power generation capacities someStates, viz., Maharashtra, Tamil Nadu and Mizoramare focusing attention on the generation of power(through the PPP mode).

2.7 Many States have initiated schemes relatingto education and socio-economic development andsocial security of Scheduled Castes (SCs),Scheduled Tribes (STs), Backward Classes,minorities and the disabled. Various States haveannounced measures towards the betterment ofeducational facilities. These include a restructuredmid-day meal programme with add-ons such as

Policy Initiatives

5

State Finances : A Study of Budgets of 2009-10

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providing meals beyond the elementary educationlevel, distribution of books, including more nutritiousfood items, diet money for the children and mothers(Punjab), comprehensive computer education/broadband connectivity and computer labs in allschools and colleges (Andhra Pradesh, Haryana,Tamil Nadu, Puducherry, Punjab, Rajasthan andHimachal Pradesh) and upgrading the existinginfrastructure of professional medical andengineering colleges or setting up new collegesthrough PPP model. For social change andempowerment, equitable access to education isensured by special schemes for the welfare ofchildren of physically and mentally challengedparents by providing them free education andaccessories and financial honorariums to theirparents (NCT Delhi, Haryana, Puducherry andBihar) and skill training for self-employment invarious fields for school dropouts. For the welfareof the weaker sections of society, various proposalshave been announced including enhanced fundsunder the Scheduled Caste Component Plan andthe Tribal Sub-Plan for developmental activities(Assam) and allocation of free-of-cost residentialplots under a new scheme of the Mahatma GandhiGramin Basti Yojana to all eligible SCs, BackwardClasses (A category) and Below Poverty Line (BPL)households (Haryana).

2.8 Housing too has received high priority withschemes such as loans at subsidised rates of interest,housing plots, financial assistance and buildingmaterials/repairing/renovation of old houses(Puducherry, Kerala, Punjab, Himachal Pradesh,Tamil Nadu and Haryana). In the health sector,Haryana, Punjab, Maharashtra, Puducherry, TamilNadu and Karnataka have proposed health insuranceschemes, medical camps and upgrading governmenthospitals. To provide minimum basic amenities tourban people, most of the States have paid specialemphasis on water supply, sewerage, transport,integrated housing and solid waste management.Recognising the growing importance of climatechange, several initiatives have been taken by variousState governments in this field as well (Box II.1).

2.9 Empowerment of women continues to beemphasised upon by the States. Measures towards

the empowerment of women include direct loansto women entrepreneurs at very low rates of interestalong with a number of other innovativedevelopmental and welfare programmes focusedon the girl child and women in States like Kerala,Tamil Nadu, Puducherry, Punjab, Rajasthan,Assam, Bihar and Haryana. Many Stategovernments encourage ‘women self-help groups(SHGs)’ as a means of faster empowerment ofwomen with schemes such as soft loans to SHGs(Tripura) and training institutes for self-employmentof women (Meghalaya).

Institutional Measures and Other Major PolicyInitiatives

2.10 The State governments have adoptedinstitutional measures oriented towards fiscaldiscipline. Thus, States have gradually put in placelegislat ions with respect to various f iscalparameters such as Fiscal Responsibi l i tyLegislations (FRLs), Value Added Tax (VAT), NewPension Schemes (NPS’), Consolidated SinkingFund (CSF) and Guarantee Redemption Fund(GRF). The progress so far has been quiteencouraging as far as the implementation of VATis concerned as all the States have implementedVAT while Twenty Six States have enacted FRLs.The position with regard to the other indicators isgiven in Table II.1.

2.11 Many State governments have taken upseveral initiatives in the form of appointing taskforces and committees/commissions. Assamproposes to set up a Water Resource ManagementCommission to make suggestions for theprevention of floods and erosion of land and landreclamation. Besides, two developmental councils,one each for women and youth are proposed to beset up, a Women Entrepreneurs Council are alsobeing set up to promote women entrepreneurs.Towards the welfare of children and to protect theirrights, the State Children Rights ProtectionCommission and a Commission for Elementary andSecondary Education to suggest a roadmap andpolicies for improving the quality of schooleducation are being set up in Assam. There is alsoa proposal for setting up the Knowledge Commission

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Policy Initiatives

Global warming has been an important topic of discussion for someyears. Climate change is primarily a consequence of the accumulationof greenhouse gases in the atmosphere. There have been a seriesof international initiatives related to climate change including theUnited Nations Framework Convention on Climate Change(UNFCCC), 1992 and the Kyoto Protocol of 1997. The United NationsEnvironment Programme included India among the 27 countries thatare most vulnerable to a rise in sea levels. Accordingly, India has putin place a comprehensive framework of legal and institutionalmechanisms and is one of the leading Emerging Market Economies(EMEs) having incorporated specific provisions for environmentalprotection in its Constitution. The Prime Minister released India’sNational Action Plan on Climate Change (NAPCC) on June 30, 2008.This focuses attention on eight priority National Missions includingsolar energy, enhanced energy efficiency, sustainable habitat,conserving water, sustaining the Himalayan ecosystem, A ‘GreenIndia’, Sustainable Agriculture and Strategic Knowledge Platform forClimate Change.

In recent years, apart from the initiatives undertaken by the UnionGovernment, there has been considerable awareness among Stategovernments in general on the ill effects of climate change, globalwarming and deforestation. Accordingly, almost all State governmentshave initiated some measures towards reducing the ill effects ofclimate change and for the promotion of renewable energy andafforestation. In fact, apart from the usual terms of references, theThirteenth Finance Commission (ThFC) will also consider, inter alia,the need to manage ecology, the environment and changed climateconsistent with sustainable development.

Many State governments, in general, are addressing importantenvironmental issues related to air and water pollution, solid wasteand sewage management, debris disposal in road and hydro powerconstruction, waste recycling and biomedical waste. Gujarat is oneof the leading States focusing on the environment. When the areaunder mangroves is decreasing in the country, Gujarat has plantedmangroves in a 935 sq. km. area through the PPP mode, which isthe second highest in the country. Gujarat has become one of thepioneer States in getting carbon credits during 2008-09. Gujarat alsoleads the States in the provision of infrastructural facilities in themaintenance of the environment. The State has till date developedaround 25 common effluent treatment plants, and around 8‘technically safe hazard disposal sites’.

The government of Rajasthan, in its budget for 2009-10, announceda new forest policy, water policy and mineral policy. In Punjab’s budgetfor 2009-10, Rs. 55 crore has been allocated for forestry and theJapan Bank for International Co-operation (JBIC) assistedafforestation project costing Rs. 262 crore will be completed in thecurrent year. In order to improve the forest area in Tamil Nadu, theTamil Nadu Afforestation Programme is being implemented at a costof Rs.567 crore with financial assistance from JBIC. Under this project,afforestation programmes at a cost of Rs.63 crore will be taken up inwhich 450 check dams and 150 recharge pools will be constructed.The scheme for growing trees on private land, implemented by theTamil Nadu government during the last two years has received agood response from the farmers of the state. In the case of Karnataka,it has been proposed to do additional afforestation in about 80,000hectares this year. The required number of plants will be providedfor the Laksha Vruksha Movement under the auspices of the bio-fuelprogramme taken up by the Western Ghat Development Task Force.Towards this end, the Karnataka budget has made a provision of

Box II.1: Climate Change and Initiatives at the State Level

Rs.20 crore. More emphasis will be given on the development ofsandalwood cultivation, prosperous green villages and medicinalplants in the state during this year. Karnataka also plans to developa wildlife sanctuary in about 2,000 acres of forest land between Hubliand Kalaghataki. A bio-fuel task force will give advice on tackling theproblem of energy deficiency by suggesting ways of usingenvironment friendly fuel made from organic resources. Mizoramplans to formulate a comprehensive forest and soil conservation andmanagement policy besides putting in place a suitable oil and naturalgas policy while Kerala has planned a mega scheme for generatinga green buffer zone around existing forests and the densification ofthe existing forest.

To make up for the deficiency of forests in Haryana, the Stategovernment has extensively promoted the plantation of forests oncommunity land and agro forests on farm land and developed areasof afforestation on community and farm land. In a major innovativeinitiative, ‘Clonal Agro Forestry’ has been introduced in the currentfinancial year to benefit small and marginal farmers while augmentingthe supply of raw material in wood based industries in the State.Himachal Pradesh intends to become the first carbon neutral State inthe country with active participation of the common public for whichthe ‘Community led Environment Assessment, Awareness, Advocacyand Action Programme for Environment Protection and CarbonNeutrality’ is being initiated in the State. In Himachal Pradesh, at present21 Catchment Area Treatment (CAT) plans are being implemented bythe Forest Department and for comprehensive plantation and soilconservation activities a total budgetary provision of more than Rs.200 crore has been made for the next year. The Himachal PradeshForest Department plans to invite partner NGOs and other non-profitorganisations to take up social forestry activities in more than 6,000sq. km. of forest land, which does not have adequate forest cover.Such partnership schemes could also earn the State carbon credits.Delhi has initiated measures to stop the pollution of River Yamuna bydesilting and also plans to constitute the ‘State River ConservationAuthority’ to make River Ganga and its tributaries pollution free. Someother measures taken by the States include: (i) tax concession onsolar energy equipment in Maharashtra; (ii) enhanced funds forafforestation and wildlife protection in Maharashtra, Meghalaya andNagaland; and (iii) imposition of land replenishment and greenenvironment charges to prevent dumps by mines and industry in Goa.

To supplement the efforts being made at the State level and to activelypromote their participation, grants could be provided to the Statesfor promoting solar and other renewable energy sources. The States,in turn, can empower local communities to suitably manage ecologicalresources, forestation and conservation of biodiversity. The transferof low carbon technologies for use in different States after adaptingthem to local needs and conditions for tackling climate change needsto be encouraged by the Central/State governments. Furthermore,States which acquire low carbon technologies through foreigncollaborations or in-house R&D and where industry based upon suchtechnologies is located may be provided additional resources as anincentive to continue these efforts and set a precedent for other Statesto follow.

References:

1. Budget Documents of State Governments, 2009-10.

2. Prasad, H.A.C. and J.S. Kochher (2009). ‘Climate Change andIndia - Some Major Issues and Policy Implications’, WorkingPaper No.2/2009, Government of India, Ministry of Finance.

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to advise the Assam government on the overalleducation policy. In Haryana, a common committee,the Village Health and Sanitation Committee, hasbeen set up to promote convergence and it is alsoproposed that a number of skill developmentcenters will be established in the State. Thegovernment of Jammu and Kashmir is appointinga multi task force comprising of experts from allrelevant fields to look into various aspects ofmulberry culture, sericulture, weaving and the silkindustry. The task force will also identify and createopportunities for employment in sectors like

tourism, horticulture, floriculture, fisheries, healthand sericulture. Kerala has proposed to set up anexpert committee to scientifically develop anagricultural calendar to reduce the need to closethe Thanneermukkom Bund. In order to formulatea comprehensive social security scheme acommittee is being set up to study the feasibility ofthis. The Kerala government has set up a‘Monitoring Commission for AdministrativeReforms’ in order to tone up the overal ladministrative machinery at the State governmentlevel. Assam has proposed a ‘Development

Table II.1: Institutional Reforms by State Governments*

State Value Added Fiscal New Pension Ceilings on Consolidated GuaranteeTax (VAT) Responsibility Scheme (NPS) Guarantee Sinking Fund Redemption

Implemented Legislation introduced Imposed (CSF) Fund (GRF)(FRL) enacted

1 2 3 4 5 6 7

1. Andhra Pradesh April 2005 June 2005 September 2004 Yes Yes Yes

2. Arunachal Pradesh April 2005 March 2006 No No Yes No

3. Assam May 2005 September 2005 February 2005 Yes Yes No

4. Bihar April 2005 April 2006 September 2005 No No No

5. Chhattisgarh April 2006 September 2005 November 2004 Yes Yes No

6. Goa April 2005 May 2006 August 2005 Yes Yes Yes

7. Gujarat April 2006 March 2005 April 2005 Yes Yes Yes

8. Haryana April 2003 July 2005 January 2006 Yes Yes Yes

9. Himachal Pradesh April 2005 April 2005 May 2003 No No No

10. Jammu and Kashmir April 2005 August 2006 No No No Yes

11. Jharkhand April 2006 May 2007 December 2004 No No No

12. Karnataka April 2005 September 2002 April 2006 Yes No No

13. Kerala April 2005 August 2003 No Yes Yes No

14. Madhya Pradesh April 2006 May 2005 January 2005 Yes No Yes

15. Maharashtra April 2005 April 2005 November 2005 No Yes No

16. Manipur July 2005 August 2005 January 2005 Yes Yes Yes

17. Meghalaya April 2006 March 2006 No No Yes No

18. Mizoram April 2005 October 2006 No No Yes No

19. Nagaland April 2005 August 2005 No Yes Yes Yes

20. Orissa April 2005 June 2005 January 2005 Yes Yes Yes

21. Punjab April 2005 October 2003 No Yes Yes No

22. Rajasthan April 2006 May 2005 January 2004 Yes No No

23. Sikkim April 2005 No April 2006 Yes Yes Yes

24. Tamil Nadu January 2007 May 2003 April 2003 Yes Yes No

25. Tripura October 2005 June 2005 No No Yes No

26. Uttarakhand October 2005 October 2005 October 2005 No Yes Yes

27. Uttar Pradesh January 2008 February 2004 April 2005 No No No

28. West Bengal April 2005 No No Yes Yes No

Sum-up 28 26 19 17 20 11

*: Position as at end-January 2010.Source: Based on Information received from respective State Governments and Reserve Bank records.

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Council’ to formulate policies and coordinateschemes for the al l round development ofminorities. Meghalaya has proposed to put in placea system to achieve 100 per cent registration ofbirths and deaths in the State. The Tamil Nadugovernment has initiated steps to set up a ‘NationalCenter for Geriatrics Research’.

2.12 In order to promote people’s participationin the formulation and implementation of Planschemes, ‘Ward Committees’ in municipalities areproposed to be set up by West Bengal. The WestBengal government has also proposed to create a‘Special Assistance Fund’ of Rs.100 crore to impartjob-oriented training and extend other necessaryassistance to those who have lost their landbecause of the setting up of industries. A ‘SpecialFund’ has been created for the welfare of artists indistress and an ‘Incentive Fund’ to rewardinnovations in science and technology in Assamhave also been started. The States of HimachalPradesh, Punjab, Kerala, Tamil Nadu, Puducherryand Jammu and Kashmir have undertaken effortsto promote tourism in their respective States.

3. Government of India

2.13 In order to cope with the impact of the economicslowdown, State governments have been permittedto borrow an additional 0.5 per cent of their GSDPduring 2009-10 by relaxing the fiscal deficit targetunder FRLs from 3.5 per cent to 4.0 per cent of theirGSDP. This will enable the State governments toraise additional open market borrowings of aboutRs.21,000 crore in the current year.

2.14 Although immediate interim relief has beenprovided from the Calamity Relief Fund (CRF) forthe devastation caused by Cyclone Aila on thecoast of West Bengal, the Union Government hasalso proposed to draw up a programme forrebuilding the damaged infrastructure in the State.The Jawaharlal Nehru National Urban RenewalMission (JNNURM) has been an important schemefor refocusing the attention of State governmentson the importance of urban infrastructure. Inrecognition of JNNURM’s role, allocation under thescheme is being stepped up. Further, in order to

improve the lot of urban poor, by providing housingand basic amenities to urban poor, the provisionsunder the Rajiv Awas Yojana (RAY) has also beenenhanced. In Maharashtra, in order to address theproblem of flooding in Mumbai, the Brihan MumbaiStorm Water Drainage Project (BRIMSTOWA) wasinitiated in 2007 and the entire estimated cost ofthe project at Rs.1,200 crore is being met throughCentral assistance. In Assam, the capital subsidyfor the Gas Cracker Project is to be provided bythe Central Government. Allocations for theRashtriya Krishi Vikas Yojana (RKVY) are alsobeing stepped up. With a view to insulatingemployment-oriented export sectors in States, theUnion Government had provided an interestsubvention of 2 per cent on pre-shipment credit forthe 7 sectors of textiles including handlooms,handicrafts, carpets, leather, gems and jewellery,marine products and small and medium exporters.The interest subvention is being proposed to beextended up to March 31, 2010.

2.15 As Micro, Small and Medium Enterprises(MSMEs) have been severely affected by theslowdown in exports and the indirect effect of theglobal financial crisis on domestic demand, it isproposed to facilitate the flow of credit at reasonablerates by providing a special fund to the SmallIndustries Development Bank of India (SIDBI) out ofthe Rural Infrastructure Development Fund (RIDF).This will help State governments as it will incentivisebanks and State Finance Corporations (SFCs) to lendto MSMEs by refinancing 50 per cent of incrementallending to MSMEs. The National Rural EmploymentGuarantee Scheme, has been acknowledged assuccess. During 2008-09, it provided employmentopportunities for more than 4.47 crore households.The scheme is planned to be converged with otherschemes relating to agriculture, forests, waterresources, land resources and rural roads. A total of115 pilot districts have been selected for such aconvergence in the first phase.

2.16 Bharat Nirman with its six schemes,including the Pradhan Mantri Gram Sadak Yojana(PMGSY), the Rajiv Gandhi Grameen ViduytikaranYojana (RGGVY) and the Indira Awaas Yojana(IAY) is an important initiative for bridging the gap

Policy Initiatives

State Finances : A Study of Budgets of 2009-10

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between rural and urban areas and for improvingthe quality of life of the people, particularly the poor,in rural areas. The allocation for Bharat Nirmanschemes will be stepped up by 45 per cent in 2009-10.To broaden the pace of rural housing, from theshortfall in the priority sector lending of commercialbanks, a sum of Rs.2,000 crore for Rural HousingFund in the National Housing Bank (NHB) isproposed to be allocated.

2.17 A new scheme called the Pradhan MantriAdarsh Gram Yojana (PMAGY) is being launchedon a pilot basis for the integrated development of1,000 vil lages across the States where theScheduled Caste population is more than 50 percent. Each village will be able to avail gap fundingof Rs.10 lakh over and above the allocations underthe Rural Development and Poverty AlleviationSchemes. The Swarna Jayanti Gram SwarozgarYojana (SGSY) is being restructured as theNational Rural Livelihood Mission to make ituniversal in application, focused in approach andtime bound for poverty eradication by 2014-15.Apart from providing capital subsidy at an enhancedrate, it is also proposed to provide an interestsubsidy to poor households for loans up to Rs. onelakh from banks. The women’s SHG movement isbringing about a profound transformation in ruralareas. It is aimed that at least 50 per cent of allrural women in India will be enrolled as membersof SHGs over the next five years and these SHGswill be linked to banks. The Rashtriya Mahila Koshhas been working towards the facilitation of creditsupport or micro-finance to poor women and hasdeveloped a number of innovative schemes for theirbenefit. In recognition of its role as an instrumentof socio-economic change and development, thecorpus of the Kosh wi