Fiscal Development in Orissa: Problems and Prospects. S.S. Rath

Transcription

1 Fiscal Developmen in Orissa: Problems and Prospecs S.S. Rah

2 Fiscal Developmen in Orissa: Problems and Prospecs * S.S. Rah* Inroducion Orissa is endowed wih rich naural resources in he form of vas mineral deposis, fores, ferile land, pleniful surface and ground waer resources, long coasline and picuresque ouris poenials. I is also rich in human resources. In spie of hese, Orissa is he poores sae in he counry oday. Nearly 48 percen of is populaion lives below povery line agains he all India average of 35.9 percen. According o he revised esimaes for he year , Orissa s ousanding deb a he end of he year was percen of compared o 30 percen on he average for he oher saes. The consolidaed deb of Orissa was percen of is revenue receips in Since i exceeds 300 percen, Orissa is considered a highly sressed sae in erms of deb and deb servicing. Considering he period hrough , he annual growh rae of public deb in Orissa works ou o percen. The gap beween he revenue receips and revenue expendiure is growing a an alarming rae, forcing he sae governmen o resor o highes scales of borrowing. The unchecked borrowing has ulimaely led o a deb rap, fiscal bankrupcy, and sagnaion of he economy. I is, herefore, necessary o find a soluion o come ou of he vicious circle of mouning revenue defici, higher doses of borrowing, higher ineres liabiliies and consequenly sill higher revenue defici and sill greaer borrowing. For reducing povery and raising he growh rae, invesmen has o be made in he developmen of adequae socio-economic infrasrucure faciliy and hereby generaing employmen opporuniies exploring he bes * The auhor graefully acknowledges several valuable commens and consrucive suggesions by Tapas Sen, Naional Insiue of Public Finance and Policy, New Delhi, and Renu Kohli, Inernaional Moneary Fund, New Delhi, for improving he qualiy of he paper. The auhor alone is responsible for any remaining errors. ** Deparmen of Economics, Sambalpur Universiy, Jyoi Vihar , Orissa. 3

3 uilisaion of he naural resource poenialiy and puing he available resources o bes use for povery alleviaion programmes. The necessary resources canno be generaed from he public secor wihou deb susainabiliy, since even borrowed funds are likely o be so expensive ha any gains from heir (assumed) opimal uilisaion can be nullified by he burden of servicing coss. Thus he fiscal prioriies for Orissa are clear: o impar susainabiliy o is fiscal sance hrough reducion in boh indebedness and deb servicing coss, and o underake necessary seps o a leas achieve regular primary surpluses. The remainder of he paper is divided ino five secions. Secion I discusses Orissa s deb posiion and is susainabiliy perspecive. An inerim assessmen of he fiscal rends in Orissa is described in secion II. In secion III, an evaluaion of he Medium Term Fiscal Framework (MTFF) for he period and arges fixed for are analysed. Secion IV of he paper discusses prospecs for fiscal reform as embedded in he MTFF. Secion V concludes. II. Orissa s Deb Posiion and is Susainabiliy Perspecive During he period o , he elasiciy of public deb o was 1.3 and he elasiciy of ineres paymen o public deb was 1.09 in Orissa. The annual growh rae of deb o raio was 3.37 percen whereas he growh rae of fiscal defici o raio was 6.93 percen. The annual growh rae of revenue defici, fiscal defici, primary defici, and ineres paymens are 39.1 percen, percen, percen and percen respecively. The growh rae of revenue defici wihou ineres paymen (primary revenue defici) is 26.8 percen. The annual growh rae of capial expendiure ou of ne borrowed funds is only 1.4 percen, whereas he growh rae of revenue defici s share ou of he ne borrowed funds is 9.1 percen annually. Abou hree fourh of he borrowings do no conribue o capial formaion, raher go owards salary and pension expendiure and deb servicing. Thus, for he governmen o inves one hundred rupees in Orissa oday, i has o borrow 424 rupees. Salary and pension ogeher is abou 150 percen of sae s own revenue and 62 percen of sae s oal revenue approximaing o 11 percen of considering average. 80 percen of sae s own revenue and 34 percen of is oal revenue 4

4 inclusive of shared axes and grans-in-aid are used up in deb servicing above, which again consiues more han 6.5 percen of. Salary, pension, and Ineres paymens cover 96 percen of sae s oal revenue and 230 percen of own revenue receips, forming around 17.5 percen of he sae s. The comparaive posiion of deb raio of Orissa wih respec o all saes can be observed a Table 1 and Table 2. Beween and , deb raio increased from percen o percen for Orissa, resuling in a hike of 17.5 percen i.e., 3.5 imes he hike in he deb raio of all saes aken ogeher during he same period. For all saes he deb raio increased from 23.5 percen o 28.5 percen beween and The deb- raio for Orissa represens almos wice he deb- raio of all saes during and Figure I depics he divergence in he deb- raio of Orissa from ha of all saes aken ogeher. Moreover, i is eviden from Table 1 ha per capia deb burden for Orissa in he year was Rs. 7, crore which is almos five imes of Rs. 1, crore, he per capia deb burden for Orissa in he year Table 1: Deb Posiion of Orissa Year Ousanding deb a he end of he year (Including P.F. and excluding WMA) As percenage of (Rs. crore) Per capia deb (R.E) (B.E)

5 Table 2: Deb Posiion of All Saes (Rs. crore) Year Ousanding deb Percenage of ,83, ,15, ,46, ,83, ,29, ,94, ,80, ,22, (R.E) 5,87, (B.E) 6,71, Deb- (%) for Orissa Debr- (%) for all Saes Figure I 6

6 The classificaion of saes in Table 3 reflecs he curren servicing capaciy, vis-à-vis, he overall deb siuaion. Excep for Karnaaka and Tamil Nadu, all oher major saes displayed high levels of ineres paymen o revenue receip raio. Among hem, he saes of Punjab, Uar Pradesh, Orissa, Bihar, Himachal Pradesh, and Kerala depic a grim scenario, wih ineres paymens higher hen 15 percen of revenue receips as also deb higher han 30 percen of. Table 3: Deb Raio (Average of o ) Very High (Above 25 percen) Very high (above 50 percen) Ineres Paymen High Medium (30-50 (20-30 percen) percen) Punjab, U.P., Orissa Wes Bengal, Rajashan Low (below 20 percen) -- High (15-25 percen) Medium (10-15 percen) Low (Below 10 percen) Bihar, Himachal Pradesh J &K, Nagaland Mizoram, Arunachal Pradesh, Sikkim Revenue Receips Raio Kerala Haryana, Andhra Pradesh, M.P., Assam Tripura, Goa Manipur Meghalaya Gujara, Maharashra Tamil Nadu, Karnaaka Noe: The deb figures for Bihar, Madhya Pradesh, and Uar Pradesh are in erms of he undivided Saes for and Deb susainabiliy implies enduring wihou breaking down; solvency on he oher hand means he abiliy o discharge one s obligaion in he long run. Fiscal Policy is susainable if he governmen is able o service he sock of public deb over he foreseeable fuure. If an eniy is insolven and sill able o coninue funcioning wihou a breakdown, i.e., susain is sance, hen i is playing a Ponzi game by borrowing more o repay he old deb finance. Solvency is a necessary condiion for susainabiliy. Solvency however is a long-erm concep. The famous Domar model concludes ha for solvency and susainabiliy of public deb he condiion k r < g should be me (where k = growh rae of public deb, r = ineres rae and g = growh rae of 7

7 ) when an economy is running by he accumulaion of primary defici in he public secor. Table 4: Orissa Ineres Paymen on Ousanding Deb Year r D (in crore) 1 (in crore) r r = 100 D (R.E) In Orissa, average ineres rae r = percen beween and During he period o , annual growh rae of (g) = percen and growh rae of public deb (k) = percen. This implies ha k > g > r. I fulfils he deb susainabiliy condiion bu does no conform o he solvency condiion. Thus, deb susainabiliy in fuure, or in a long erm perspecive, is uncerain as solvency is he necessary condiion for susainabiliy and i is a long-erm concep. In simple erms, susainabiliy is defined as he abiliy o mainain a consan deb- raio over a period of ime. Susainabiliy weakens when he deb- raio reaches an excessive value and governmen revenue is no enough o service he deb. A sable deb- raio could be achieved even wih primary defici, provided i is lower hen he spread beween growh in and ineres rae. 8

8 Year Ineres Rae (r) percen Table 5: Impac of Spread and Primary Defici on Deb- Raio growh rae (g) percen Rae spread (g-r) percen Quanum Spread g -r D ( ) D Fiscal imbalance g -r + Prim. De f ( ) Rs. crore Prim.Def percen Deb percen Rs. crore

9 From Table 5, i is seen ha in he case of Orissa, boh quanum spread and primary balance are unfavourable beween and resuling in a rising deb- raio reflecing deb unsusainabiliy. I can be derived from he Domar condiion of deb susainabiliy ha if quanum spread ogeher wih primary defici is zero, deb- raio would remain consan. From equaion (13), D 1 + g = def f (see Appendix 1). y g Thus a 3.0 percen of f Fiscal Defici def =, if growh rae (g) is 10 percen, he sable Deb raio will be = 33 percen 0.10 Since here is a correspondence beween growh and growh in sae s revenues (buoyancy of oal receips for saes is approximaely 1), i is more appropriae o anchor deb as a percenage of oal revenue receips, and monior his raio. Using his variaion of he Domar formula, sable and susainable deb o oal revenue receips work ou o 300 percen for non-special caegory saes. Those saes which fall under he non-special caegory and whose raios of consolidaed deb o revenue receips exceed 300 percen can be considered as highly sressed saes in erms of deb and deb servicing. For saes falling under special caegory, if he raio exceeds 200 percen, hen i can be considered highly sressed. In he year , going by his yard-sick, wo saes falling under he special caegory, namely, Assam and Himachal Pradesh and five saes falling under he non-special caegory namely, Kerala, Orissa, Punjab, Rajashan, and Wes Bengal were highly sressed. By he year , he number of highly sressed saes is likely o increase o eigh (wo non-special caegory saes and six special caegory saes, wih Maharashra joining he group). Saes like Andhra Pradesh, Kerala, Maharashra, Orissa, Punjab, Rajashan, Gujara, and Wes Bengal remain highly sressed hroughou he forecas period. 10

10 In saes such as Orissa, Wes Bengal, and Himachal Pradesh, salaries, pensions and ineres paymens are nearly or more han 100 percen of heir oal revenue receips including ransfers from he cener. These Saes sock of deb as a percenage of projeced canno sabilize in he medium-run. To discharge even he minimum of he Sae s funcion, he Sae will have o borrow increasing amouns over he reform period. Orissa Governmen has been employing a disproporionaely large number of saff in is various Deparmens. Raio of governmen employmen per 100 persons in Orissa is Table 6 gives informaion on governmen employees in Orissa. Grades Table 6: Employees Posiion in Orissa Toal no. of employees Percenage of oal salary expendiure accouned for by he grades Percenage of oal no. of employees A B C D DLR/NMR/JC Toal Ou of which Grans-in-aid Employees Iniially, he sae governmen had is own pay srucure for employees, bu in course of ime he pay srucure had o be revised in accordance wih he pay scale of he cenral governmen employees. Salaries and reiremen benefis including pension o he reired employees impose a heavy burden on he sae exchequer. The annual increase in he salary bills of he governmen employees and he compensaory dearness allowance. resuls in an annual increase in wage bill and is subsanially higher han he growh rae of is revenue receips. I has been a major conribuor in he deerioraion of he fiscal siuaion. 11

11 Table 7: Ineres Paymen on Governmen of India Loan Year (Gov. of India (In) Ineres rae Loan) -1 ( percen ) / Noe: Average ineres on he Governmen of India Loan is percen paid by Governmen of Orissa ( ) Year Table 8 : Ineres Paymen on Open Marke Loans (open marke loan) -1 (Rs crore) (In) (Rs crore) Ineres rae ( percen) Noe: Average ineres rae on open marke loan is percen paid by Governmen of Orissa ( ). 12

12 Table 7 and Table 8 explain ineres paymen on Governmen of India loan and open marke loan respecively during he period ( ); average ineres paymen on he Governmen of India loan is percen which is less han percen on open marke loan. Table 9: Iem-wise Deb as Percenage of Toal Deb of Governmen of Orissa Year GOI loan/ oal deb ( percen) Open marke loan/ oal deb ( percen) Table 10: Percenage of Iem-wise Deb o Toal Deb of Governmen of Orissa Average ( ) % of GoI Loan o Toal Deb % of Open marke loan o Toal Deb Table 9 reflecs iem-wise deb as percenage of oal deb of Governmen of Orissa. From Table 10 i is eviden ha here is a percenage decline of he Governmen of India loan o oal deb and i is replaced by open marke loan ec. as eviden from a comparison beween he figure and ha of he average for he period This shif has resuled in he enhancemen of he proporion of ineres paymen o he oal revenue of he Governmen of Orissa because he average ineres rae on he open marke loan is higher han he average rae of ineres on Governmen of India loan. 13

13 Despie he highes deb- raio in he counry, Orissa has no gained much from he deb relief recommended by various Finance Commissions. This may be seen a Table 11. Table 11: Deb Relief o Orissa by Differen Finance Commissions Finance commissions 8 h Finance Commission ( ) 9 h Finance Commission ( ) 10 h Finance Commission ( ) 11 h Finance Commission ( ) Toal deb relief recommended for all saes (Rs. in crores) Deb relief recommended for Orissa (Rs. in crores) Orissa s share in he oal deb relief (in percenage) Nil Nil Nil The Elevenh Finance Commission did no recommend any deb relief in quaniaive erms bu recommended general deb relief for all saes linked o fiscal performance. I has also been claimed ha owing o various reasons mainly overesimaion of ax devoluion and underesimaion of non-plan deficis cenral ransfers received by Orissa hrough he Finance Commission recommendaions were subsanially less han wha hey ough o have been. Table 12 quanifies he loss of revenue receips of Orissa ransferred from he cenre hrough he award of Elevenh Finance Commission. 14

14 Table 12: Loss of Elevenh Finance Commission Transfers for Orissa Year Shorfall in cenral ax (Rs crore) Excess non-plan defici no covered (Rs crore) Toal loss (Rs crore) Toal These direc losses caused an addiional indirec loss o he sae as well. As per he objecive of he Moniorable Fiscal Reform Policy recommended by he Elevenh Finance Commission for Orissa, revenue defici (RD) as a percenage of revenue receips (TRR) in he base year should have been limied o percen. Wih reducion of 5 percen in each year, he arges for , and were fixed a percen, percen and percen respecively (see, Table 13). Acual reducion of RD/TRR raio by (43.74 percen percen = percen) beween and , which is more han 5 percen, allowed release of he sae s share of incenive fund (Rs crore) in Bu Orissa was deprived of he incenive fund in , as i could no acually fulfil he arge of reducion of 5 percen in he RD/TRR raio. Had he raio been correced for he direc losses in , i would have been only percen, and his would have allowed he release of incenive fund in , which could have improved he raio of RD/ TRR furher. Year Table 13: TRR, RD, and RD/TRR for Orissa if Correced TRR (acual) (Rs. crore) RD (acual) (Rs. crore) TRR If conneced (Rs. crore) RD if correced (Rs. crore) RD / TRR (acual) (Rs. crore) RD / TRR if correced ( percen) (surplus) Anoher indirec loss o he sae was in respec of deb relief recommended by he Elevenh Finance Commission. According o he 15

15 recommendaion of he Commission, improvemen in fiscal performance is o be measured by comparing he raio of revenue receip (including share in cenral axes bu excluding he grans-in-aid under Aricle 275) o he revenue expendiure in a given year (r) wih he average of he corresponding raio (r*) of immediaely preceding hree years. Thus each sae is o be considered agains is own performance in he pas. Deb relief will be calculaed as a percenage of repaymens falling due in each year of he period of recommendaion, Only hose repaymens as peraining o cenral loans o he sae during o and as ousanding on will be covered. The percenage (R) will be five imes of r *, defined above. Thus if he r performance of a Sae improves by 2.5 percen, i.e., r r * = 2.5 percen, he sae governmen will become eniled o a relief equivalen o 12.5 percen (R=12.5%). The maximum limi of R has been prescribed as 25 percen. Year Ne revenue receips (acual) (Rs crore) Table 14: Correced (r) Ne revenue receips (if correced) (Rs crore) Revenue expendiure (Rs crore) (r) (acual) (r) if (correced) Noe: Ne Revenue Receips = Revenue Receips including share in cenral axes bu excluding he grans-in-aid. Table 15: Deb Relief on Correced (r r*) Year (r-r*) (acual) (r-r*) (if correced) Deb relief (acual) Deb relief (if correced) Nil 3 percen Nil 26 percen (25 percen maximum) I is eviden from Table 14 and Table 15 ha Orissa could have been benefied hrough deb relief of 3 percen and 25 percen of repaymen of deb o cenral governmen falling due in he year

16 and respecively peraining o cenral governmen loan o Orissa during o in accordance wih he provision of Elevenh Finance Commission. Table 16: Consolidaed Deb o Correced TRR Raio Year Consolidaed deb / correced revenue receip ( ) average percen percen percen percen Table 16 projecs he raio of consolidaed deb o correced revenue receip, had here been deb relief from he cenre o Orissa during o and derives he average of he raio in he period a percen. The ulimae aim of medium erm fiscal reforms is o aemp o bring down deb o a susainable level. Therefore, he sock of consolidaed deb o oal revenue receips should no exceed 300 percen. This could have been possible if here had been deb relief by he cenral governmen amouning o ( Acual Avg. ) ( ) Deb in Toal Revenue Receips % - 300% TRR This implies deb relief amouning o Rs. ( ) ( )% = ( ) ( 78.36) % = crore. In , Orissa s ousanding loan from he cenral governmen was Rs crore. Afer he proposed deb relief his migh have been Rs. ( ) = crore wih 62 percen of deb relief. I migh have resuled in oal ousanding deb amouning o Rs. ( ) = crore. Esimaed Deb raio would have been percen insead of percen (acual) in

17 III. An Inerim Assessmen of he Fiscal Trends in Orissa Some selec indicaors of Sae finances for he period and he ime profile ill are given in Table17 and Table18. I is eviden ha he overall performance of Orissa in comparison o all saes aken ogeher is saisfacory. Table 17: Fiscal Indicaors of Orissa Indicaor ( percen) ( ) Average ( percen) SOR / TRR OTR / TRR R.D / TRR In. Pay / TRR NPRE / TRR Consolida ed deb TRR Cenral ransfer TRR Salaries pensions and In. paymen TRR Sae s own fiscal effor SOR: Sae Own Revenue, TRR: Toal Revenue Receips, OTR: Own Tax Revenue, RD: Revenue Defici, NPRE: Non-plan Revenue Expendiure. 18

18 Table 18: Fiscal Indicaors of all Saes Indicaor ( percen) (Average) ( percen) SOR/TRR OTR/TRR RD/TRR In. pay./trr NPRE/TRR Consolidaed deb TRR Salaries, pension and in. pay/ TRR In. Pay/SOR Salaries, pension and in. pay/sor RD/SOR Cenral ransfer/trr Sae s fiscal effor = ( SOR ) - ( R.E ) TRR One maer of concern for Orissa is he significan difference of consolidaed deb-trr raio on he higher side, i.e. ( ) percen = percen in he average for he period In Orissa, he proporion of cenral ransfers o oal revenue receips has declined from percen o percen, whereas his proporion has increased from percen o percen for all saes. Also, in Orissa he proporion of salaries, pensions, and ineres paymens o oal revenue receips is also much higher in comparison o all saes aken ogeher, even hough here is no significan difference in he proporion of non-plan revenue expendiure o oal revenue receips beween Orissa and all saes aken ogeher. In fac here is a higher reducion in he proporion of NPRE o TRR beween ha for and he average of Orissa in comparison o all oher saes. However, he proporion of ineres paymen o TRR has increased considerably for Orissa from ha of all saes during he period under consideraion. 19

19 IV. An Evaluaion of Medium Term Fiscal Framework Under he medium erm fiscal reform sraegy (MTFRS), he deb o raio and ineres paymens o revenue expendiure raios are argeed o decline over he medium erm. The MTFRS has he dual aim of: reducing waseful expendiure and cuing low prioriy spending; and improving ax collecion and improving he efficiency of he ax adminisraion and ax regime. The arge fixed by he Governmen of Orissa hrough MTFRS is o reduce he deb- raio o 48 percen by and 36 percen by Figure-2 plos proporion of deb and differen ypes of defici o for Orissa. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Deb/ Primary Def. / Fiscal Def. / Revenue Def. / Figure II Table 19: MTFF ( o ) 20

20 (percenage) Raio (argeed) (projeced) Annual average reducion (desired) Deb Fiscal Def Primary Def. Table 20: MTFF ( o ) (percenage) (In percen) (argeed) (projeced) Annual average reducion (desired) Deb Fiscal Def Primary Def. Noe: See Appendix II Table 19 and Table 20 spell ou he desired annual average reducion of he differen raios o achieve he argeed deb- raio of 48 percen and 36 percen by and respecively. I is eviden from Figure 2 ha exceping revenue defici o raio, oher raios have increased from o average. The fiscal problem faced by Orissa broadly consiss of wo faces, namely: 21

21 he srucural imbalance beween annual revenues and nonineres expendiures; and he inheried problem of high deb-servicing burden resuling in high cos of curren borrowing. Accordingly, he approach of he Governmen of Orissa o emerge from he crisis and achieve fiscal susainabiliy consiss of wo componens, namely: revenue and expendiure reforms o eliminae he primary (nonineres) defici and hereby aack he srucural roos of he problem; reduce he deb-servicing burden hrough maximum possible use of deb swaps/ resrucuring and by achieving a lower average cos of fresh financing during hrough increased use of exernal assisance in place of high-cos domesic borrowing. The Governmen of Orissa agreed o adop he following assumpions for he period in he final MTFF for Programmaic Srucure Adjusmen Loan (PSAL). Orissa s own ax revenue would grow wih a buoyancy of 1.25 wih respec o or around 13 percen in nominal erms, on average during Cenral ax devoluion o Orissa would grow a he rae of nominal GDP of India (around 12 percen). Non-ax revenue, including user charges, would grow o reach 2 percen of by compared o 1.6 percen in Governmen of Orissa would swap Rs.1800 crore of high cos Governmen of India loans during , for fresh and less expensive small savings and bonds issued o Governmen of India owned banks and financial insiuions. Salary bill will be conained hrough righ sizing and measures o raionalise saff benefis, hereby reducing is share of he sae s own and mandaed resources o less han 50 percen by and abou 40 percen by Reducion of primary defici o no more han 1.5 percen of in is he likely requiremen for PSAL-II, while he 22

22 achievemen of primary surplus is likely o be required for PSAL- III in or , depending on how soon a primary surplus is achieved, by or by The Sae Governmen abolished 75 percen base level poss on April 1, As many as 24,220 of he 59,364 vacan poss were done away wih, and by he end of Augus, i was proposed o abolish anoher 21,000 poss. In is effors o bring fiscal correcion, he sae governmen is commied o bring down he raio of salary o sae s own revenue (SOR) from 100 percen in o 80 percen by To achieve his, he governmen will have o reduce he saff srengh by a furher 20 percen. V. Prospecs for Medium Term Fiscal Framework Given he high level of sae s ousanding liabiliies, cerain correcive measures are ineviable. Correcive measures leading o susainabiliy of deb can be effecive only when he sae governmen makes persisen aemps o pu heir finances on a sound fooing by addiional revenue effor, expendiure compression and re-prioriisaion in line wih he resrucuring plans. An immediae focus of he fiscal reforms should be on achieving revenue balance or a leas reducing he revenue imbalance o a minimum. Bailous hrough wrie offs or waivers can never be a long-erm soluion. The Governmen of Orissa has aken a number of measures for revenue generaion hrough raionalisaion of differen ax raes, broadening he ax base, and beer enforcemen. The average annual growh rae of sae s own revenue in he period is 11 percen, while he argeed average growh rae is 13 percen for he period Wih a view o generae addiional resources and bail ou he cash-srapped governmen, recenly he cabine gave green signal o he proposal for including 30 more iems under he purview of enry ax. More insiuions and professions will now come under he purview of professional ax. The insiuions which will be brough under he purview 23

23 of professional ax include uorials, nursing homes, privae clinics, diagnosic cenres, video parlours, kalyan mandaps, ISD-STD boohs, phoocopy cenres, cable operaors, courier services, ranspor conrac agencies, adverisemen firms, ravel agencies, inerior decoraors, and brokers and sub brokers of sock exchanges. Minimum enry ax of Rs. 2,500 will be imposed. The sae governmen has se milesones for all adminisraive deparmens. Formulaing he medium erm fiscal plan for , i has decided o underake srucural correcion a micro level for he adminisraive deparmens. While asking he finance deparmen o able a Fiscal Responsibiliy Bill in he Assembly, he governmen inended o bring down he defici arge by 0.5 percen of he gross domesic produc every year. I also fixed up a benchmark for he finance deparmen for reducing he salary of he governmen employees o 96 percen of sae s own revenue by he end of The finance deparmen has been asked o coninue is drive o reduce he gap beween he revenue expendiure and revenue receips. While he indusrial scenario is looking up afer a lull, he governmen has direced he indusry deparmen o implemen furher measures o raionalise regulaions for enry of privae invesmen. Inroducion of an Indusrial Faciliaion Bill for single window clearance of projecs is he need of he hour. The agenda for he Agriculure and Cooperaion Deparmen is o bring amendmens in is exising policy on markeing of agriculural produce and o lif sae monopoly for aracing privae invesmen in marke yard and sorage faciliy. The Public Enerprise (PE) Deparmen has been given he ask of speeding up reforms by privaising a leas wo addiional PE unis every year. Finance, higher educaion, school and mass educaion deparmens have been asked o expedie he civil service reforms by reducing he saff srengh o he desired level of abolishing 75 percen of he base level vacan poss. 24

24 The energy deparmen has been asked o esablish ime mechanism o ensure regular and full paymen of curren energy bill by he governmen. I has also been asked o prepare a business plan o subsanially eliminae of power hef. The arge for planning and coordinaion deparmen is o ensure imely expendiure of he funds alloed under sae plan and cenrally sponsored schemes and submission of uilisaion cerificae o he cenre. The general adminisraive deparmen will submi an anicorrupion acion plan. The objecive of he micro srucural correcion is o mobilise addiional resources o enhance he pace of economic growh of he sae. Deb-Swap Deb resrucuring involves a combinaion of deb conversion and deb reducion sraegies by employing insrumens like deb-swap, deb buy-back, and deb relief. In case of deb-swap here is a subsiuion of high cos, pas deb wih fresh deb a curren (lower) marke raes of ineres. Though here is no reducion in he size of he deb, considerable reducion in he required ineres paymen would reduce he size of fuure fresh borrowings. Since here is no pu or call opion aached o liabiliies of sae governmens, resrucuring of deb could be possible only in he case of cenral loans hrough he deb-swap scheme (wha is ofen ermed as wihin he family approach). The union governmen has announced a deb-swap scheme ha would enable saes o pre-pay heir high cos deb. Under he scheme muually agreed beween he cenral and sae governmens, all sae loans from he cenre bearing coupons in excess of 13 percen would be swapped wih marke borrowings and small saving proceeds a prevailing ineres raes over a period of hree years ending in Under he deb-swap scheme for Orissa during he year , adjusmen ou of sae s share of ne small savings collecions amouns o Rs crore and Rs crore is he allowed SLR marke borrowings. 25

25 Table 21: Improvemen in Quanum Spread hrough Deb Swapping Year (Projeced) deb (Rs crore) Projeced gov. of India loan (Rs crore) Assumed (r=11 percen) Ineres Ineres afer deb-swapping of enire GoI loan Ineres rae afer deb swapping ( r )% Improvemen in spread = ( r -r )% Improvemen in Quanum spread D ( r - r )% (Rs crore)

26 Firs, he deb-swap scenario has been generaed assuming ha Orissa is allowed o replace he enire liabiliy owed o he cenre hrough fresh low cos marke borrowings a he assumed ineres rae of 6.0 percen. As a resul, projeced overall ineres rae on he deb sock comes down o 8 percen in wih he assumpion of prevailing 11 percen average rae of ineres, he Governmen of India loan being 60 percen of he oal deb and growh rae of public deb considered as percen i.e., he average growh rae beween he period o Improvemen in rae spread and quanum spread is calculaed in Table 21. However, hey coninue o be inadequae o accommodae he primary defici, which is projeced o grow a percen in he corresponding period. The impac of he deb-swap scheme canno be fel significanly on he deb servicing liabiliies of he sae owards achieving a sable deb- raio. Neverheless, his process will help he sae in reducing he burden of ineres paymens in he years o come. However, wih he sae s credi raing going down is scope of marke borrowing is limied for he purpose wihou guaranee from he union governmen. VI. Conclusion Orissa, he poores sae in he counry, survives financially for mos par of he year wih ways and means advances as well as overdraf (OD) from he RBI. In , he deb rapped sae was able o manage is finances wihou recourse o hese only for 15 days. The precarious fiscal siuaion is due o poor ax base, drop of ransfer of revenue from he cenre, unsusainable deb burden, and he ever-rising deb servicing liabiliies. The sae has been forced ino a siuaion where he governmen has o excessively depend on WMA and OD from RBI. In , he sae depended on WMA and OD from RBI for 358 days. In , i was bailed ou by RBI almos hroughou he year. However, in , he sae s dependence on RBI was limied o 345 days. The sae borrowed Rs.7,700 crore as WMA and OD loan in , according o he revised esimae. The sae s WMA and OD in was Rs. 6,723 crore compared o Rs 7,830 crore in Even in , WMA and OD was crore. The main cause of fiscal deerioraion in Orissa is he ever-increasing ineres burden. The sae has been forced 27

27 o borrow more funds for deb servicing and meeing oher expendiures. Wih he sae s credi raing going down, is scope of borrowing from he open marke is also geing limied. Governmen esimaes pu ousanding deb of he sae a Rs. 42, crore in , an amoun exceeding he revised esimae of 32, crore in by Rs. 10, crore. The per-capia deb burden of he sae is esimaed a Rs. 9, in The srucural adjusmen programme involves a series of hard decisions affecing enrenched vesed ineress. There has o be, herefore, a definie commimen of all poliical paries o carry hrough his programme of he governmen for he broader ineres of he sae. No one dispues he responsibiliy of he sae o augmen he ax effor and o conrol he revenue expendiure. Bu wih a low ax base, in spie of he bes ax effors a subsanially larger ax revenue canno be harnessed in a period of five years, ha oo in a sae which is regularly visied and revisied wih various ypes of naural calamiies ha reduce he disposable incomes of he people and push more people below he povery line. The presen paern of plan assisance has an in-buil loan componen of 70 percen, which auomaically increase he deb burden over a period of ime in erms of redempion of principal amoun and also enhance he revenue expendiure by increasing he ineres liabiliy a relaively high average rae of ineres. I has a direc bearing on plan resources and i becomes difficul for a sae o mainain a posiive balance. Reducion in he proporion of cenral ransfer o oal revenue receips conribues adversely even when he sae governmen concenraes on he improvemen of he sae s fiscal effor hrough he adopion of fiscal and governance reforms programme. In he case of Orissa, he governmen fails o benefi from he fiscal incenive schemes and in addiion o his, ges deprived of deb relief programme of he cenral governmen loans as i is linked o prescribed fiscal indicaors. Therefore, here is he need for a prescripion of a criical and susainable deb- raio by he Finance Commission. Saes like Orissa having deb- raio above he susainable level should be covered by a special deb relief scheme. The soundness of a sae s finances depends on he level of developmen and srucure of he economy. In he presen hinking, an ideal siuaion in sae finance is one where he sae generaes adequae 28

28 revenues for is own developmen needs and incurs as lile deb as possible, and borrowings are only made for producive invesmen. This proposiion assumes ha he problem of an economy is only one of governance and managemen and rules ou he role of srucural consrains in inhibiing he process of developmen. On he oher hand, in he conex of an economy wih srucural deficiencies and dominance of marke imperfecions, he governmen should hasen he process of developmen and should aemp o overcome srucural bolenecks in he economy. Given he coninuing backwardness of Orissa s economy, he role of he sae and increasing public invesmen o overcome he srucural rigidiies canno be overesimaed. Given he low per capia income of he sae, he imporance of public goods wih is exernaliies and consequen failure of he marke o ener has o be properly undersood before he wihdrawal of he sae from invesmen decisions. In such a conex a declining cenral assisance keeps he sae backward and coupled wih poor governance, leads he sae ino a possible deb rap. I mus be remembered ha in he las more han fify years he srucure of plan invesmen has no undergone major changes and he sae has shown a propensiy o increase he service secor a he expense of primary and secondary secor in is Sae Domesic Produc. This has no helped he cause of sae finances eiher. 29

29 Reference Ahluwalia, Monek S Economic Performance of Saes in Pos- Reform Period, Economic and Poliical Weekly, May 6: Balakrishnan, Pulapre The Fiscal Defici in Macro Economic Perspecive, in Sudipo Mundle (ed.), Public Finance: Policy Issue for India. New Delhi: Oxford Universiy Press. pp Bhaacharya, B.B India s Economic Crisis, Deb Burden and Sabilizaion. Delhi: B.R. Publishing Corporaion. Blanchard, Oliver Jean and Sanley Fischer, Lecures on Macro Economics. Cambridge, Massachuses: The MIT Press p127. Buier, Willem H. and Urji R. Pael, Deb Deficis and Inflaion: An Applicaion o Public Finance of India, Journal of Public Economics, Vol. 47: Cuddingon John T Analysing he Susainabiliy of Fiscal Deficis in Developing Counries, Economics Deparmen, Georgeown Universiy, Washingon. Finance Deparmen, Governmen of Orissa, 2001: Whie Paper on Orissa Sae Finance. Bhubaneswar. (March) Orissa Budge Bhubaneswar. (March) Fiscal and Governance Reforms, Repor and Circular. Bhubaneswar. (June), Terms of References of Twelfh Finance Commission: Issues o be Discussed, Bhubaneswar. (Sepember) Fourie, F.C.V.N and P. Burger, Is Fiscal Susainabiliy Aainable? High Ineres Raes, Low Growh and he General Balance Effec, The Souh African Journal of Economics, Vol

30 Governmen of India (GoI), Review of Sae s Fiscal Reforms Faciliy ( o ) An Inernal Assessmen, Minisry of Finance, Deparmen of Expendiure. Gershenson, Dmiryi Lecures on Fiscal Policy and Fiscal Susainabiliy, IMF Insiue, Washingon D.C.(mimeo) Lahiri, Ashok. K Budge Deficis and Reforms Economic and Poliical Weekly, November 11: Lahiri, Ashok K. and Kannan, R India s fiscal defici and heir susainabiliy in perspecive, Naional Insiue of Public Finance and Policy, New Delhi. (working paper) Lapius, Jerry Lecures on Susainabiliy of Public Deb, IMF Insiue, Washingon D.C. (mimeo) Prasad, Abha, Rajan Goyal, and Anup Prakash, Saes Deb and Deb Relief, Economic and Poliical Weekly, June 26: Moorhy, Vivek India s Primary Defici and Ineres Paymens Burden, An Assessmen Economic and Poliical Weekly, June 26: Rah, Sudhansu Sekhar Fiscal Defici and is Susainabiliy Perspecive for a Backward Sae in India: A Case Sudy of Orissa in K.R. Gupa (ed: Liberalizaion and Globalizaion of Indian Economy, Vol. V: Shome, Parhasarahi India s Fiscal Maers. New Delhi: Oxford Universiy Press. Sobhee, Sanjeev K Modeling he Susainabiliy of Public Deb: The Case of Mauriius Indian Journal of Economics, Vol- LXXX, No-319. Buier, Willem H Measuring Fiscal Susainabiliy Washingon D.C: Inernaional Moneary Fund. 31

31 APPENDIX - I According o Domar s model for solvency of public deb, P DEF D = -. (i), o = 1 ( 1 + r) where D is he presen sock of ousanding deb and DE P F o represens primary defici for he ime period and r is he ineres rae. I implies ha for solvency, presen ousanding sock of public deb mus be equal o he summaion of discouned primary surplus of fuure years expressed i erms of presen value. P DE F D - ( 1 + r ) So D = - o = 1 = D...(ii) D Le D ( 1+ ) -1 ( + ) ( 1+ r) - 1 r D -1.. = k D, where k is he annual growh rae of public deb. -1 ( 1+ k) D -( 1+ r) D 1-1 D = - o = 1 ( 1+ r) (iii) = ( k -r) D = 1 ( 1+ r) -1 = ( r-k) = 1 D -1 ( 1+ r)..(iv) = ( r k) 1 ( 1+ k) ( 1+ r) D 1 ( r-k) 1+ k D o ( 1+ r) = 1 1+ r o = (v) = 1 D = 0, if r=k ( 1+ r ) equaion (i) o i.e., Ineres rae = growh rae of public deb. -1 P D = D + DE F (1) from D ( 1+ r ) y P = (2) y D DEF y 32

32 D 1 + r D DEF =.. (3), y 1 + g y P + y 1 where g is he annual growh rae of. P 1+ r d = d + def. (4), 1 g -1 + whered and represen deb o raio in ime period and -1, d 1 P P respecively. def = def, since he raio of primary defici o is argeed o a consan value. Solving he firs-order difference equaion (4) d 1+ g P 1+ r 1+ g P = d - def + def..(5) o g -r 1+ g g -r 1+ g P d endso def g -r 1 + r 0, for 1 + g This is possible if 1+ r 0 < < 1 1+ g ( 1 + r) < ( 1+ g) r< g i.e., ineres rae mus be less han he annual growh rae of. Domar model concludes ha for solvency and susainabiliy of public deb k r < g, i.e., growh rae of public deb ineres rae < growh rae of when an economy is running by he accumulaion of primary defici. Equaion (4) can also be expressed as P ( r-g ) d def d = +. (6) -1 I can be represened hrough he following diagram: 33

33 Y d r>g r>g d = d -1 r<g def p d -1 X -def p Y 34

34 From he above diagram i is eviden ha when r > g, for he susainabiliy of public deb, i.e., o keep d = d or for achieving a sable, i.e., primary surplus o raio. This can be derived in he following manner: 1+ r P d = d + def by equaion (4) 1 g r P d d -Sur 1 g = -1 + or, 1 r Su P + r= d -d in saic sense. 1+ g = r g d. (7) 1+ g Therefore when r > g, for an economy o achieve deb susainabiliy Primary Surplus r - g Deb Su r P = = 1+ g Deb susainabiliy can also be considered in erms of fiscal defici by he Domar Model ( Fiscal Defici) = D - D (8) P consan deb- raio for he fuure here mus be argeed ( def) -1-1 ( FiscalDefici ) ( FiscalDefici) D = D + (9) D D -1 = +.. (10) y y y D y D y D y - D DEF f -1 = +.. (11) ( 1 + g ) y -1 y D f = def.. (12) in saic sense. ( 1 + g ) y. (13) g = D y g 1 + g f = def I implies ha for he deb susainabiliy Deb 1 + g Fiscal Defici =. (14) g -1 35

35 APPENDIX - II I is already menioned ha beween and annual growh rae of (g), Public Deb (k), Deb and Fiscal Defici are percen, percen, 3.37 percen and 6.93 percen respecively. The average rae of ineres is percen. Growh rae of Primary Defici = 1.7% In , Deb = percen; herefore i is projeced ha in , he Deb = percen + (3.37 percen X 6) = percen. To keep he Deb average reducion in he approximaely. raio a 48 percen in , he 67% 48% 6 Deb raio should be ( ) 3% = To keep he Deb raio a 48 percen Primary Defici g -r 12.63%-11.29% 48% 48% 48% 1.34 = = = = 4.7% 1+ g The projecion of he Primary Defici in is 17.65% + ( 1.7 6) % = 27.85%. The average reducion in he Primary should be ( ) = 3.86% Defici % 6 FiscalDefici = 48% g 1+ g = 48% 12.63% 13.63% = 44.47% 36

36 The projecion of he Fiscal Defici in is percen + (6.93 x 6) percen = percen. The average annual reducion in [( )/6] percen = 2.95 percen Fiscal Defici should be In , if he same rend coninues, Deb will be projeced a: (58.80 percen) + (3.37 percen) X 7 = percen percen =82.39 percen. Therefore o sabilize he Deb a 36 percen by , average annual reducion in Deb should be ( ) % = 6.6%. 7 Primary Defici 12.63% % % should = be 36% = 36% g - r 1 + g = 3.5% = 36% Projeced Primary Defici in will be 17.25% + ( )% = 29.15%. ( ) The average reducion in he % = 3.66% 7 Primary Defici should be 37

37 Fiscal Defici = 36% mus = be = 36% 33.35% 1 g + g Projeced FiscalDeficiin will be 23 percen + (6.93 percen) x 7 = percen. This requires average annual reducion of FiscalDefici obe ( ) 7 % = 5.45%. 38