State Finances of Odisha:

Transcription

1 State Finances of Odisha: Introduction The overall fiscal scenario in Odisha continued to be broadly satisfactory from onwards despite a couple of aggregate indicators causing some concern. The basic prudential policy of maintaining revenue account surpluses to finance the capital outlays in developmental sector continued to be successfully implemented. The continuous decline in debt stock to GSDP ratio and debt servicing ratio with higher growth in GSDP has made the state fiscal policy sustainable and solvent. Revenue Surplus, low fiscal deficit and low debt to GSDP ratio has created space for more borrowing. Considering, the positive impact of debt on the potential GSDP of the state, there is a need for incurring fresh debt, to facilitate higher allocation in developmental sector for creation of capital assets as well as maintenance of the existing assets so as to increase the productivity of the state economy. Guided by the rolling targets of the Medium Term Fiscal Plan, a part of the obligations under the fiscal responsibility legislation of the State, key fiscal parameters were kept within permissible range, meeting an important conditionality of the Thirteenth Finance Commission of India. All these are achieved against the backdrop of the sluggish growth in Indian Economy. The subdued macro-economic scenario has affected the State s finances to a limited extent. Besides transfers from the Centre also exhibited fall; for a state like Odisha that is heavily dependent on the central transfers, such fall can have serious consequences. 9.1.Overview The continued modest economic growth, particularly so in the mining and manufacturing sectors has adversely affected the buoyancy in both tax and non-tax revenues of the State. The central transfers that includes both shared taxes and grants, after dropping noticeably in and as ratios of GSDP, have increased in and mainly due to the transfer of Central Assistance for 66 restructured Centrally Sponsored Schemes (CSS) through Consolidated Fund of the State and the discontinuance of the previous practice of direct transfer of central assistance to various implementing agencies. Therefore, 9 / 1

2 the higher grants from the centre are because of the change in the accounting of financial assistance for the centrally sponsored schemes (CSS). Total revenue receipts (as % of GSDP) have gone up from 17.65% in to 18.40% in and 21.35% in (BE) respectively. Figure 9.1 presents the trends in broad fiscal parameters of revenue and expenditure that sum up the fiscal position of the State. Figure 9.1: Trends in Broad Expenditure Ratio (% GSDP) Revenue expenditures were also higher at 16.51% of GSDP in as compared to 16.45% in However, the Total Revenue Receipt has gone from 17.65% of GSDP in to 18.40% of GSDP in The State could break the capital outlay barrier of 3 per cent of GSDP in by achieving Capital Outlay at 3.6% of GSDP. Besides, the State could achieve total expenditure more than 20% of GSDP in The Total Revenue Receipt and total Revenue Expenditure are budgeted at 21.35% and 19.81% of GSDP respectively in The Capital Outlay and Total Expenditure are estimated at 4.56% and 25.42% of GSDP in During to , the annual average total revenue receipt has increased by 0.40% of GSDP as against annual average rise in revenue expenditure of 0.51% of GSDP during the same period. As a result, the revenue surplus of 2.23% of GSDP in has come down to the level of 1.89% of GSDP in The zero fiscal deficit position in 9 / 2

3 (BE) has gone up to -1.17% of GSDP in This implies the entire borrowing during this time period has financed higher capital outlay and it has reached to a level of 3.57 % of GSDP. It is budgeted at 4.56% of GSDP in Figure 9.2 depicts the trends the major deficit indicators. Figure 9.2: Major Deficit Indicators (% GSDP) Revenue Deficit /. Fiscal Deficit /. Primary Deficit / *Negative (-) sign indicates deficit During to (BE), the State has been generating Revenue Surplus as against the revenue deficit of all the states in India at the consolidated level during the same time period. Though, the fiscal deficit which indicates the net borrowing of the states is going up since , because of less interest expenditure, the primary deficit ratio of the State has remained favorable as compared to all states in India 1. The fiscal deficit is required to be kept within the prescribed 3% of GSDP in terms of FRBM Act and should be taken care of while working out the revised estimates for Fiscal consolidation in Odisha has been undertaken under a rule based framework through the enactment of Odisha Fiscal Responsibility and Budget Management (FRBM) Act, The management of state finance in Odisha is guided by FRBM Act, 2005 and the recommendation from successive finance commissions. The State Government has amended the FRBM Act, 2005 on the basis of recommendations of the 13th Finance Commission. To examine the impact of FRBM Act on the Odisha s fiscal space, the time 1 State Finances: A Study of Budgets , Reserve Bank of India 9 / 3

4 RDR FDR PDR period for assessment of fiscal performance is undertaken by considering two time periods around the implementation of FRBM legislation. The time periods for assessing the fiscal performance in terms of major deficit indicators are from to (Pre FRBM Period) and to (Post FRBM Period). Each time period is of ten year duration and annual average of major fiscal deficit indicators are taken to assess the impact of FRBM Act on state fiscal performance. Figure 9.3: Major Deficit Indicators (% GSDP): Pre FRBM & Post FRBM 2.00% 1.90% 1.58% 1.00% 0.00% -1.00% -0.38% -2.00% -1.60% -3.00% -4.00% -3.34% -5.00% -6.00% -5.58% Pre FRBM /. Post FRBM /. *Negative (-) sign indicates deficit, RDR, FDR & PDR are Revenue Deficit, Fiscal Deficit and Primary Deficit Ratio as proportion of GSDP Figure 9.3 presents a comparative view of State Fiscal Performance in terms of major fiscal deficit indicators in Pre FRBM and Post FRBM Period. A significant improvement has been registered in Post FRBM Period over Pre FRBM Period. 9 / 4

5 (BE) Average 9.2. Composition of Total Revenue Receipt The contribution of State Own Revenue to total Revenue Receipt has increased to 53% and 52% respectively in and from 49% in During and (BE), the share of Central Transfer has been more than the share of State Own revenue. This is mainly due to change in the accounting of financial assistance for the centrally sponsored schemes (CSS). Figure 9.4 presents the trends in composition of Total Revenue Receipt. The average share of State Own Revenue and Central Transfer to the Total Revenue Receipt is calculated at 49% and 51% respectively during to (BE). Figure 9.4: The composition of Total Revenue Receipt 60.00% 50.00% 49% 51% 53% 52% 47% 48% 51% 49% 43% 57% 51% 49% 40.00% 30.00% 20.00% 10.00% 0.00% SOR / CT / *SOR: State Own Revenue, CT: Central Transfer The State Own Revenue andcentral Transfer are reported at 9.02% and 9.47% of GSDP during to (BE) Trends in State Own Revenue The State Own Revenue (SOR)as proportion of GSDP has improved from 8.83% to 9.11% in The rising trend is mainly driven by State Own Tax Revenue(SOTR).Because of deterioration in collection of State Own Non Tax Revenue(SONTR) in , the SOTR as a proportion of GSDP has declined to 9.01%.An important reason for the lowsontr of the 9 / 5

6 (BE) State is sluggish tax collection on account of subdued mining activities. The budget estimate of SOR is pegged at 9.12% of GSDP. Figure 9.5 presents the trends in SOR.. Figure 9.5: Trends in State Own Revenue Receipt (% of GSDP) SOTR /. SONTR /. SOR /. *SOR: State Own Revenue, SOTR: State Own Tax Revenue. SONTR: State OwnNon Tax Revenue The Tax to GSDP ratio represents the tax efficiency of the state. The consolidated SOTR to GSDP ratio for all the states in India is reported at 7.8% and 7.7% respectively in and which higher than Odisha. The consolidated State Own Non Tax Revenue to GSDP ratio for all the states in India is reported at 1.3% and 1.4% respectively in and which lower than Odisha. Hence, there is a need to raise the efficiency in Tax Revenue for the state as efficiency is below the national average. 9 / 6

7 Figure 9.6 presents the composition of SOTR and SONTR in State Own Revenue. Figure 9.6: Composition of SOTR and SONTR Composition in (BE) 30% 70% SOTR SONTR The share of SOTR and SONTR in State Own Revenue is 68% and 32% respectively during to In order raise the SOTR to GSDP ratio and buoyancy in SOTR, the share of SOTR has been targeted at 70% in (BE) Tax Buoyancy Tax buoyancy is defined as the ratio of growth in tax revenue to the growth in the corresponding nominal GSDP. Figure 9.7 presents the trends in buoyancy in both SOTR and SONTR. The buoyancy in SOTR has been inelastic in and average buoyancy during the period to (BE) is calculated at The buoyancy in SNOTR has been inelastic in and negative in The average buoyancy during the period to (BE) is estimated at Figure 9.7 presents the trends in tax buoyancy. 9 / 7

8 (BE) Average Figure 9.7: Trends in Tax Buoyancy SOTRB SONTRB *SOTRB: State Own Tax Revenue Buoyancy, SONTRB: State Own Non Tax Revenue Buoyancy 9.4. Trends in State Own Tax Revenue The tax structure of the State has been subtly changing over the years, and particularly in the recent period. The composition of taxes reflects the structure of the state economy. The trends in collection of taxes as percentage of GSDP are presented in the table / 8

9 Table 9.1: Trends in Collection of Taxes (% of GSDP) Item Average to (BE) Sales Tax (VAT) 3.64% 3.79% 3.87% 3.81% 3.78% 3.85% State Excise 0.61% 0.59% 0.64% 0.66% 0.62% 0.69% Stamp Duty & Regn Fees 0.22% 0.21% 0.22% 0.26% 0.23% 0.50% Entry Tax 0.58% 0.53% 0.58% 0.55% 0.56% 0.58% Motor Vehicle Tax 0.35% 0.29% 0.31% 0.29% 0.31% 0.32% Electricity Duty 0.24% 0.23% 0.24% 0.56% 0.32% 0.25% Land Revenue 0.23% 0.16% 0.16% 0.21% 0.19% 0.14% Profession Tax 0.06% 0.05% 0.05% 0.05% 0.05% 0.06% Other Taxes 0.03% 0.03% 0.02% 0.01% 0.02% 0.01% Total : 5.97% 5.89% 6.09% 6.40% 6.09% 6.40% The collection of sales tax (VAT), being the consumption based tax, is growing since and the average collection on account of VAT as proportion of GSDP is reported at 3.78%. It is targeted at 3.85% of GSDP in (BE). Followed by VAT, the collection of State Excise and Entry Tax are calculated at 0.62% and 0.56% of GSDP during to In this period, the entry tax has exhibited a declining trend. State Excise and Entry tax are budgeted at 0.69% and 0.58% respectively in A declining trend is observed in case of Motor Vehicle Tax and Stamp & Registration fee. Professional tax has been stagnating during this period. The descriptive statistics of the tax components of SOTR is presented in table 9.2. Table 9.2: Descriptive Statistics Collection of Taxes (% of GSDP) Sales Tax (VAT) State Excise Stamp Duty &Regn Fees Entry Tax Mean 3.79% 0.64% 0.27% 0.56% Std. Dev. 0.08% 0.04% 0.11% 0.02% Skewness % 35.17% % % Median 3.79% 0.62% 0.22% 0.56% Minimum 3.64% 0.59% 0.21% 0.53% Maximum 3.87% 0.69% 0.50% 0.58% Motor Vehicle Tax Electricity Duty Land Revenue Profession Tax Mean 0.31% 0.31% 0.18% 0.05% Std. Dev. 0.02% 0.13% 0.03% 0.00% Skewness % % 34.69% 30.63% Median 0.31% 0.24% 0.16% 0.05% Minimum 0.29% 0.23% 0.14% 0.05% Maximum 0.35% 0.56% 0.23% 0.06% 9 / 9

10 The fluctuation in the collection of Stamp Duty and fees is relatively high as compared other taxes. The fluctuation in professional tax is zero as the collection has stagnated over the years. The skewness is highest for Motor Vehicle Tax as after achieving 0.35% of GSDP in , the collection is showing a declining trend. Because of mixed trends in the tax components, the SOTR to GSDP ratio in the state is not high. Clearly, taxes with a broad consumption-type base are more buoyant than the others, possibly reflecting the pattern of sectoral growth in GSDP during the last five years. The uncertainties regarding the countrywide introduction of a goods and services tax (GST) continue to plague comprehensive reform of the tax system and the services sector (i.e., the largest part of GSDP) is largely out of the tax net at the State level, except the State share in service tax levied by the Centre. The prolonged sub judicestatus of entry tax has added to the uncertainties in the tax system of the State Composition of State Own Tax Revenue Figure 9.8 and 9.9 presents the share of tax components in SOTR for the period from to and for (BE). Figure 9.8: Composition of Tax Components from to % 4% 9% 5% 6% 4% 3% 1% 0% 62% Sales Tax (VAT) Stamp Duty & Regn Fees Motor Vehicle Tax Land Revenue State Excise Entry Tax Electricity Duty Profession Tax Other Taxes 9 / 10

11 Figure 9.9: Composition of Tax Components for (BE) 11% 8% 9% 5% 4% 2% 3% 1% 0% 60% Sales Tax (VAT) Stamp Duty & Regn Fees Motor Vehicle Tax Land Revenue State Excise Entry Tax Electricity Duty Profession Tax During to , the share of VAT in SOTR is highest at 62% followed by State Excise (10%), and Entry Tax(9%). These three tax components contribute almost 80% of the SOTR. In (BE), these components are expected to contribute 80% of the SOTR. However, considering the declining trend in Stamp Duty & Registration fee, the budget has estimated 100% growth over , expecting the rise of share from 4% in to 8% share in The tax gap in Stamp Duty & Registration fee is acknowledged and there is a felt need to bridge this gap Buoyancy of Major items of State Own Tax Revenue As discussed earlier, buoyancy is a performance measure of the revenue collection with respect tothe growth in state economy. Table 9.3 presents trends in tax buoyancy of major tax items of State Own Tax Revenue. Steady buoyancy is not observed from the trend. During the period from to , though the annual average buoyancy is highest for Stamp Duty & Registration Fees at 4.25, it has exhibited very high 9 / 11

12 variation 2. Electricity Duty has the second highest buoyancy at 2.04 coupled with highest variation. Land Revenue has recorded lowest buoyancy with a very high variation. VAT and Excise Duty have shown elastic buoyancy with moderate variation. Table 9.3: Trends in Buoyancy of Major Tax Components Item Average Variation Sales Tax (VAT) State Excise Stamp Duty &Regn Fees Entry Tax Motor Vehicle Tax Electricity Duty Land Revenue Profession Tax Total : It is observed that the correlation between average tax buoyancy and variation in tax buoyancy is very high at 62% Composition of State Own NonTax Revenue Mobilization of resources through non-tax sources serves the twin purpose of having a rational non-tax structure and generating resources to finance more expenditure. The importance of non-tax revenue is now being realized by the states in India in the context huge financialrequirements for upgrading and modernizing basic infrastructure. Therefore, non-tax revenue is essential to finance the operation & maintenance (O&M) of existing capital assets that creates positive externalities.mobilizing resources through a rational non tax structure induces equity, efficiency and neutrality on the growth pattern of the state. During to (BE), the compound average growth rate of SONTR has been 8.76% only. The growth in collection of non-tax revenue has witnessed a huge variation of 17% during this time period.this indicates that the growth rate of collection of State s Own Non Tax Revenue has been uneven. This high variation is mainly attributed to receipts from sources like Mining Royalty, Interest, Dividend, and receipts from Forest and Irrigation sectors. During the same period, the SONTR as proportion of GSDP is estimated 2 Variation is measured by Standard Deviation 3 Correlation Coefficient 9 / 12

13 at 2.87%. The SONTR constitutes only 31% of the State Own Revenue. Table 9.4 presents the trends in collection of non-tax components as proportion of GSDP. Table 9.4: Trends in Major Non Tax Components Non Tax Components (% GSDP) (BE) Average Variation Interest 0.26% 0.23% 0.45% 0.11% 0.06% 0.21% 0.17% Dividend 0.13% 0.22% 0.16% 0.35% 0.33% 0.27% 0.09% Education 0.01% 0.03% 0.03% 0.01% 0.01% 0.02% 0.01% Medical 0.02% 0.00% 0.01% 0.01% 0.01% 0.01% 0.00% Water Supply & 0.03% 0.02% 0.02% 0.02% 0.02% 0.02% 0.00% Sanitation Housing 0.01% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% Forest & Wildlife 0.09% 0.07% 0.03% 0.02% 0.01% 0.03% 0.03% Irrigation 0.15% 0.16% 0.16% 0.20% 0.15% 0.17% 0.02% Non-Ferrous Mining & Metallurgical Industries 2.03% 2.23% 1.99% 1.71% 1.99% 1.98% 0.21% Others 0.16% 0.19% 0.16% 0.17% 0.12% 0.16% 0.03% During to (BE), revenue collection from Mining activity has been highest at 1.98% of GSDP followed by Dividend Receipt, Interest Receipt and user fee from Irrigation. Revenue Collection from Mining and Interest Receiptshas huge variation followed by Dividend. The correlation between the tax collection as proportion of GSDP and the variation in tax collection is very high at 79%. This further validates the acute unevenness in collection of non-tax revenue. Equity (Share) Capital is the paid up capital infused by the State Government in Statutory Corporations (3 nos.), Govt. Companies (84 nos.), Joint Stock Companies (23 nos.), Cooperative Societies (31 nos.) and Rural Banks (3 nos.) aggregating 142 entities. The Return on Equity Capital (ROEC) is measured by the dividend received as proportion outstanding equity capital. In FY , ROEC has increased by 2.38 times over FY because of more dividend pay-out by the government Companies. The ROEC is calculated at 30.71% in FY as against 13.67% in FY The Return on Cash Balance on Investment Account (ROCBI) is measured by interest realised over cash balance in investment account. Cash Balance on Investment Account includes Cash Balance, Investment from Cash Balance (G-Sec & T-Bills) and other Cash Balances. Others Cash Balances include cash with department officers, cash in both sinking fund and guarantee redemption fund. The interest realised includes interest on 14 Days Treasury Bills rediscounted during the year. ROCBI has reduced to 3.12% in FY as 9 / 13

14 against 6.57% in FY because of very high deposits with R.B.I at the end of FY Figure 9.10 presents the composition of Non Tax Components. During to , the share of revenue from Non-Ferrous Mining & Metallurgical Industries (Mining Royalty) in SONTR is highest at 72.3% followed by Interest Receipt (9.4%) and Dividend (8.2%). Revenue collection from Major, Medium & Minor Irrigation constitutes 6.2% and collection from Forest & Wild Life contributes 1.8% of the SONTR. The collection in (BE) from Non-Ferrous Mining & Metallurgical Industries (Mining Royalty) is estimated at 73.5%, followed by followed by Dividend at 12.1% of SONTR. Revenue collection from Major, Medium & Minor Irrigation is expected at 5.5% and collection from interest Receipt is pegged at 2.2% of the SONTR. User Charges from water supply & sanitation, medical facilities and education are expected to contribute 0.8%,0.4% and 0.3% respectively. Figure 9.10: Composition of Non Tax Components 0.2% 0.8% 0.4% 0.7% 1.8% 6.2% 8.2% 9.4% 80.4% 72.3% Interest Dividend Education Medical Water Supply & Sanitation Housing Forest & Wildlife Irrigation Non-Ferrous Mining & Metallurgical Industries 9 / 14

15 (BE) Grants to GSDP /. Grants to TRR / Central Transfers Central transfers comprise of shared taxes (devolution from the Centre) and grants. The Central transfers as proportion to GSDP as well as proportion to Total Revenue Receipt are presented in Table 9.5. Table 9.5: Trends in Central Transfers Year Shared Tax (Rs. Cr) Grants ( Rs. Cr) Central Transfer % of TRR % of GSDP % 9.05% % 8.16% % 8.54% % 9.39% (BE) % 12.23% In and , the Central Transfers as a percentage of TRR and GSDP has declined mainly due to decline in Grants as proportion to both GSDP and TRR. Figure 9.11 presents the trends in grants component. Figure 9.11: Trends in Grants 7.00% 29.70% 35.00% 6.00% 30.00% 5.00% 4.00% 3.00% 2.00% 20.25% 3.62% 15.61% 2.69% 17.22% 3.04% 22.66% 4.17% 6.34% 25.00% 20.00% 15.00% 10.00% 1.00% 5.00% 0.00% 0.00% Grants to GSDP /. Grants to TRR /. 9 / 15

16 (BE) In and , the share of grants to Central Transfer has also declined. Figure 9.12 presents the trends in share of grants component in Central transfer. Figure 9.12: Trends in Share of Grants in Central Transfers 60.00% 50.00% 40.00% 40.0% 32.9% 35.6% 44.4% 51.8% 30.00% 20.00% 10.00% 0.00% The grants can be broadly divided into Plan grants and non-plan grants. While non-plan grants include Finance Commission mandated grants as well as other (often discretionary) non-plan grants, Plan grants broadly include grants for State Plan Schemes, Central Plan Schemes, Centrally Sponsored Schemes, and Special Plan Schemes (not applicable to Odisha at present). The share of central transfer to total Revenue Receipt in case of Odisha has been over 50% over the years. However, the trend was reversed in and when the Central transfer fell below 50% due to lower central transfer in shape of grants. However, consequent upon the decision to route the Central Assistance for 66 restructured CSS through State Budget, Odisha s dependence on central transfer has increased to 57.30% in the year (BE).Figure 9.13presents the composition of different components of central grants received by the Government of Odisha in recent years. During to , in total Grant-in-Aid from Central Government, the share of grants for State Plan Scheme is highest at 58% followed by Non-Plan grants at 25% and grants for Centrally Sponsored Schemes at 16%. Block grant which is part of the State Plan Scheme constitutes 33% of total grants and 57% of the State Plan Scheme. In , Non Plan Grant was drastically reduced by 41% over / 16

17 Non-Plan grants Grants for state Plan schemes Block grants Grants for central Plan schemes Grants for centrally sponsored schemes Figure 9.13: Composition ofgrants-in-aid 60.00% 40.00% 20.00% 0.00% 25.1% 57.8% 32.8% 1.6% 15.5% * Block grants is part of State Plan & calculated as proportion of total Grants-in-aid Table 9.6provides trends in components of central grants received by the Government of Odisha in recent years. Table 9.6: Grants Received by Government of Odisha from the Centre (Rs. in Crore) Category of Grant Grants-in-aid from central government a. Non-Plan grants b. Grants for state Plan schemes of which, Block grants c. Grants for central Plan schemes d. Grants for centrally sponsored schemes Source: Finance Accounts, various issues 9.9. Trends in Functional Classifications of Revenue Expenditure Revenue expenditures and capital outlay have been fluctuating around 15% and 2% of GSDP respectively during & Clearly, the intended push to capital outlay was not materializing despite higher budgetary allocations, primarily because of institutional 9 / 17

18 constraints. However, it has increased to 2.8%& 3.6% in & respectively. The Budget estimates for the year show that these constraints may be easing up and the capital outlay is expected to be at4.6% of GSDP. Simultaneously, revenue expenditure is expected to increase significantly to 19.8% of GSDP. With the increase in revenue receipts in & (BE), the increase in both revenue expenditure and capital outlay represent a fuller utilization of available resources under the constraint of the fiscal responsibility legislation as compared to the immediately preceding years. The structure of revenue expenditure in terms of distribution among broad groups of expenditure remains stable, with small year-to-year changes. Figure 9.14 summarizes the structure of revenue expenditure.the share of General, Social & Economic Services is fluctuating over the years where as the share of Assignments to Local Bodies shows a decreasing trend from It may, however, be noted that there are additional transfers to local bodies through some of the other budgetary categorieswhich is determined by the implementation of the awards of the State Finance Commission. The changing composition outlined above is generally considered to be in the desirable direction. Figure 9.14: Composition of Revenue Expenditure in Odisha (%) (BE) Total Revenue Expenditure A. General Services B. Social Services C. Economic Services D. Assignments to Local Bodies and PRIs 9 / 18

19 9.10. Trends in composition of Committed Revenue Expenditure Another way of looking at the composition of revenue expenditures is to consider the proportion pre-empted by committed expenditures, defined here as the contractual expenditures for salaries and wages of government employees, pensions and retirement benefits of retired government employees and interest payments. Figure 9.15 shows the share of such contractual expenditure in total revenue expenditures is fluctuating over years. It is estimated that the committed expenditure was about 43% of the total revenue expenditure in which has been increased to 48% in & (BE). These trends are to be reversed to allow a higher proportion to directly development-oriented policies. Figure 9.15: Composition of Committed Revenue Expenditure 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% (BE) Salaries and Wages Pensions Interest Payments Others Trends in components of Revenue Expenditure The composition of revenue expenditure by budgetary categories in more detail is provided in Table 9.7. While pensions are seen to be outstripping interest payments in recent years, expenditure on each of the key areas within social and economic services is seen to have grown apace; only the expenditure on medical and public health seems to be lagging somewhat. Given its priority, the relatively slow growth of expenditures on this category needs to be corrected. 9 / 19

20 Table 9.7: Composition of Revenue Expenditure in Odisha Item (Rs. Crore) (BE) Total Revenue Expenditure A. General Services of which Interest Payments Pensions B. Social Services of which General Education Medical and Public Health Water Supply and Sanitation C. Economic Services of which Agriculture and Allied Services Rural Development Irrigation and Flood Control Roads and Bridges D. Assignments to Local Bodies and PRIs Memo Item: Salaries and Wages Source : Finance Accounts (various issues) and Budget Document, Table 9.8 provides the sector wise contribution to the revenue expenditure. The Developmental services Sector contributes around 68% of the total revenue expenditure. In the Developmental Sector, more emphasis is given to Social Services Sector as compared to Economic Services Sector. This is on account of the outcome of policy orientation towards the inclusive growth. General Education in Social Services Sector and Rural Development in Economic Services Sector are given higher allocation. Medical and Public Health, Water Supply & Sanitation, Irrigation & Flood Control and Roads & Bridges need more allocation 9 / 20

21 for operation & maintenance of capital assets as theses developmental sub sectors create significant positive externalities. Table 9.8: Composition of Revenue Expenditure in Odisha (in percentage) Item (BE) Total Revenue Expenditure A. General Services Interest Payments Pensions B. Social Services General Education Medical and Public Health Water Supply and Sanitation C. Economic Services Agriculture and Allied Services Rural Development Irrigation and Flood Control Roads and Bridges D. Assignments to Local Bodies and PRIs Memo Item: Salaries and Wages (B+ C) Developmental Services Efficiency in Revenue Expenditure Revenue expenditure neither creates assets nor reduces a liability and generally, it is incurred on normal running of the government departments, operation and maintenance of existing infrastructural services. It is a short period expenditure and recurring in nature which is incurred every year (as against capital expenditure which is long period expenditure and non recurring in nature). Since, Revenue Expenditure is recurring and immediate in nature, it should be matched with non-tax revenue of the current accounting period. Efficiency in Revenue Expenditure of a sector is measuredby the non-tax revenue mobilized from that particular sector. This is essentially the cost coverage ratio. To measure the efficiency, Revenue Expenditure in Economic Services Sector is taken into consideration. This efficiency measurement is Return on Revenue Expenditure (RORE). The average RORE for the State is estimated at 52.8% as against average of 20.7% for the consolidated States in 9 / 21

22 4, , ,445 9,018 7,756 10,513 11,075 15,544 15,149 18,649 India for the period from to This indicates that approximately 53% of the Revenue Expenses in the Economic Services Sector is covered by the non-tax revenue collection from the Economic Services Sector in the State as compared to only 21% for all the States in India Trends in components of Capital Outlay The thrust on capital outlay discussed above is clearly brought out in Figure The compound annual average growth (CAGR) rate of capital expenditure during to (BE) has been 26% which is mainly contributed by 35% CAGR in in capital outlay. This impressive rise in capital outlay is attributed to 34% rise in capital outlay on CAGR basis in the Developmental Services Sector. In the Developmental Sector, the Social Sector and Economic Sector Services Sector have contributed 37% and 33% CAGR respectively during this time period. In a relatively less developed state like Odisha, the importance of these expenditures for sustained economic growth need hardly be emphasized. As a result, the capital outlay to GSDP ratio has significantly increased from 2% in to 4.56% in (BE). Figure 9.16: Capital Expenditure in Odisha (Rs.Crore) (BE) Capital Outlay* Loans and Advances (Gross) Debt Repayment (Gross) Transfer to Contingency Fund Total Capital Expenditure 9 / 22

23 FY FY Figure 9.17 depicts the comparative position of Capital Outlay in Non-Developmental Expenditure to total Non-Developmental Expenditure and Capital Outlay in Developmental Expenditure to total Developmental Expenditure for the period and Figure 9.17: Capital Outlay Ratioin Developmental and Non Developmental Sector 15.00% 14.04% 14.95% 10.00% 5.00% 5.68% 5.18% 0.00% DE /. NDE /. DE: Capital Outlay in Developmental Expenditure, NDE: Capital Outlay Non Developmental Expenditure The discernible rise in share of Capital outlay and Developmental Expenditure in total expenditure confirms the State s commitment to strengthen the quality of expenditure and to sustain the higher, sustainable andinclusive economic growth of the state Analysis of Debt Stock Position At the time of introducing the fiscal responsibility legislation, the outstanding debt to GSDP Ratio (Debt Stock Ratio) of Odisha was close to 48% coupled high debt servicing ratio (IPRR) 4 of 30% that raised the specter of non-sustainability of such a high level of debt, particularly because states in India have no way of financing their deficits except through additional borrowing. The state finances have come a long way from that stage in the intervening years; the debt stock ratio and debt servicing ratio have improved to13.97% and 4.93% respectively in With deficits reigned in, there is no apprehension regarding 4 Debt Servicing Ratio is defined as Interest Payment to Total Revenue Receipt Ratio(IPRR) 9 / 23

24 Pre FRBM Post FRBM sustainability at all. In fact, the State has not even made any recourse to the Reserve Bank of India s overdraft facility in recent years. To assess the impact of FRBM Act, 2005 on the management of debt position of the State, the trends in debt indicatorsduring the period to (Pre FRBM Period: 10 Years) and to (Post FRBM Period: 10 Years) are examined. Figure 9.18 presents the comparative position of debt indicators. Figure 9.18: Comparative Position of Debt Indicators in Pre & Post FRBM Period 39.91% 40.00% 30.00% 29.66% 23.57% 20.00% 10.00% 11.44% 0.00% Debt Stock /. IPRR /. The average outstanding debt to GSDP Ratio (Debt Stock Ratio) has declined significantly from 39.91% during Pre FRBM Period to 23.57% in Post FRBM Period showing an improvement of 16.34%. Similarly,the average Debt Servicing Ratio (IPRR) has declined significantly from 29.66% during Pre FRBM Period to 11.44% in Post FRBM Period showing an improvement of 18.22%. The FRBM stipulation for debt stock ratio is 29.5% and for debt servicing ratio is 15% for One of the reasons for the continuous improvement in debt stock ratio and debt servicing ratio is the less borrowing at lower cost to keep fiscal deficits and debt servicing ratio below the prescribed level stipulated in the fiscal responsibility legislation. In order to have a clear scenario, table 9.9 presents the descriptive statistics of debt indicators in both Pre and Post FRBM Period. 9 / 24

25 Table 9.9: Descriptive Statistics of Debt Indicators in Pre and Post FRBM Period Pre FRBM Period Post FRBM Period Debt Stock IPRR Debt Stock IPRR Mean 39.91% 29.66% 23.57% 11.44% Std. Dev. 7.52% 5.64% 9.81% 6.64% Median 37.80% 28.12% 19.81% 9.20% Minimum 28.81% 21.03% 13.92% 4.93% Maximum 50.73% 40.22% 42.84% 26.25% Range 21.92% 19.19% 28.92% 21.32% The average cost of Borrowing 5 during Pre FRBM Period is estimated at 10.66% has declined to 7.75% during Post FRBM Period. The lower cost of borrowing is represented by the trend line in figure The cost of borrowing was at 10.08% and 10.95% in and respectively. It has come down to 7.54% and 6.86% during and Figure 9.19: Trends in Cost of Borrowing 14.00% 12.00% 10.00% 11.0% 11.3% 10.9% 10.1% 12.6% 11.7% 11.1% 9.6% 10.1% 10.1% Trend Line Line 8.00% 6.00% 7.5% 8.7% 8.6%7.9% 8.2% 8.0% 6.6% 7.3%7.5% 6.9% 4.00% 2.00% Pre FRBM Post FRBM Period 0.00% Average Interest Payment of the State is 1.03% of GSDP compared to all State average of 1.50% during to During the same period, the Debt Stock of the State is at 14.40% of GSDP compared to all State average of 21.27%. The Interest 5 Cost of Borrowing t = Interest Payment t / Average ( Debt Stock t &Debt Stock t-1 ) 9 / 25

26 Odish a All States Debt Stock /. IPR /. payment to Revenue Receipt ratio is estimated at about 5.74% during to This indicates that the debt stock of Odisha is at sustainable level. Figure 9.20 presents the comparative position of the State with all States at consolidated level. Figure 9.21 presents the trends in debt indicators of the State since Figure 9.20: Comparative Positions of Debt Indicators 25.00% 2.00% 21.27% 20.00% 15.00% 14.40% 1.50% 1.50% 10.00% 1.03% 1.00% 5.00% 0.50% 0.00% 0.00% IPR /. Debt Stock /. Figure 9.21 presents the trends in debt indicators of the State since The continuous improvement both in debt stock ratio and debt servicing ratio is also witnessed in these last five years. During these last five years, the debt stock has declined by 5.85% and debt servicing ratio by 4.27%. The compound average growth rate (CAGR) of Debt stock during these last five years is calculated at only 2.54%. The Interest payment has witnessed a negative compound average growth rate (CAGR) of (-) 2.12%. 9 / 26

27 Debt Stock /. IPRR /. Figure 9.21: Trends in Debt Indicators: to % 10% 9% 20% 19.81% 8% 17.13% 7% 15% 10% 5% 9.20% 14.88% 6.40% 6.39% 13.95% 13.97% 5.90% 4.93% 6% 5% 4% 3% 2% 1% 0% 0% IPRR /. Debt Stock / Analysis of Debt Sustainability and Debt Solvency Fiscal Policy is sustainable if the Government isable to service the Debt Stock over the time periods when the interest payment is due. If the Government is insolvent and still able to continue to service the debt, then it is borrowing more to repay the interest payment. Therefore, Solvency is a necessarycondition for sustainability. Solvency is a long-term aspect of the debt position of the Government; sustainability is a short term aspect. To achieve both solvency andsustainability of public debt, the following condition is to be adhered. d c< g Where d is the growth rate of debt stock, c is the cost of borrowing and g isgrowth rate of nominal GSDP. The debt sustainability and debt solvency of Post FRBM is compared with Pre FRBM Period. 9 / 27

28 The Pre FRBM Period is of 10 years spanning from to and the Post FRBM Period is also of 10 years spanning from to Table 9.10 presents the estimated variables. Table 9.10: Pre FRBM and Post FRBM Debt Sustainability Parameters Variables Pre FRBM Post FRBM d 15.62% 1.92% c 10.66% 7.75% g 10.36% 15.48% d is the compound average growth rate in debt stock, g is the compound average growth rate of nominal GSDP. c is the cost of borrowing. The cost of borrowing is calculated as interest payment as proportion to average debt stock of last year and current year. 6 It is observed that the condition of d c < gis not satisfied during Pre FRBM Period. Therefore, the debt was not sustainable, as was well as not solvent. The state was in debt trap condition. However, in Post FRBM Period, the condition of d c < gis satisfied. Therefore, both debt sustainability and solvency is achieved in Post FRBM Period. The fiscal policy of the State during the Post FRBM Period wherein there has been a significant decline in both Debt to GSDP ratio and Debt Servicing Ratio has transformed the State to a debt solvency situation Composition of Out Standing Debt Stock and Outstanding Liability The Outstanding Public Debt and Outstanding Borrowing from State Provident Fund constitute Outstanding Debt Stock of the State. Outstanding Public Debt, Outstanding Borrowing from Public Accounts and Contingency Fund constitute total Liability of the State. During to , the share of debt stock to total liability is estimated at 80%. The public debt andstate Provident Fund contribute 63% and37% of the total debt stock. The Public Debt, Public Account and Contingency Fund constitute 50%, 49% and 1% to the total 6 Interest Payment is also made on quarterly and semi-annual basis. 9 / 28

29 liability respectively. The trend in composition of liability as proportion to GSDP 7 is given in table Table 9.11: Trends in Composition of Liability (% of GSDP) Liabilities Consolidated Fund (a+b+c+d+e+f) Public Debt a b Open Market Borrowings (Net SLR based Market borrowings) Borrowings from Banks and FIs/ Negotiated Loans c Special Securities issued to NSSF d Bonds/ Debentures which are issued by the State Govt.t e Loans from Centre (Net) f Other Liabilities (a+b+c) Public Accounts a State Provident Funds b Small Savings, Insurance and Pension Funds, Trust and Endowments, etc c Other items in Public Accounts of which i. Deposits Bearing Interest Not Bearing Interest ii. Reserve Funds/ Sinking Fund Bearing Interest Not Bearing Interest Contingency Fund Total Liabilities (1+2+3) GSDP is at Base. 9 / 29

30 Figure 9.22 presents the trends in the composition of debt stock to GSDP Ratio. The declining trend is observed in most of the components of the debt stock. Outstanding debt on account of State Provident Fund as proportion to GSDP has declined from 6.86% in to 5.30% in Debt on account of NSSF as proportion to GSDP has declined from 4.28% in to 3.25% in However, the negotiated loan from the Financial Institutions and Banks has increased from 1.43% of GSDP in to 1.61% in Debt due to Open Market borrowing through State Development Loan has decreased from 3.12% of GSDP in to 1.47% of GSDP in Loansfrom Centre has also come down from 3.84% of GSDP in to 2.30% in Figure 9.22: Composition of Debt Stock as % of GSDP Open Market Borrowings (Net SLR based Market borrowings) Borrowings from Banks and FIs/ Negotiated Loans Special Securities issued to NSSF Bonds/ Debentures which are issued by the State Govt.t Loans from Centre (Net) State Provident Funds Figure 9.23 presents the dispersion of the outstanding debt in State Provident Fund contributes 38% of the total debt followed by Special Securities issued to NSSF(23%), Loans from Centre(16.50%), institutional borrowings(11.50%) and Open Market Borrowing (10.55%) 9 / 30

31 Figure 9.23: Dispersion of Debt Stock at the end of % 23.28% 16.46% 54.41% 11.50% 10.55% Open Market Borrowings (Net SLR based Market borrowings) Borrowings from Banks and FIs/ Negotiated Loans Special Securities issued to NSSF Bonds/ Debentures which are issued by the State Govt.t Loans from Centre (Net) 37.96% One of the reasons for the continuous decline in debt components is to keep fiscal deficits below the prescribed level under the fiscal responsibility legislation which reduces net debt burden of the State.If growth in GSDP exceeds the growth in outstanding debt, debt to GSDP ratio will decline and will be below the FRBM stipulation. Higher growth rate in GSDP compared to growth in debt stock coupled with low cost of borrowing has made the fiscal policy of the State sustainable and has created solvency in debt.frbm legislation as a fiscal policy rule has helped to achieve stability in State Finance and efficiency in expenditure allocation. Now that the State s finances are considerably stable, the tasks of further improving the quality expenditure, regular expenditure review, expanding the coverage of public services, and of investing in social and physical infrastructure are very critical to achieve higher inclusive growth rate on sustainable basis.in order to fulfill this objective the State has to go for higher capital receipts to fund capital outlay in developmental sectors as there is capacity to sustain additional debt burden and the State economy has reached a stage wherein it can absorb higher capital outlay after the fiscal stabilization. 9 / 31