Tame subsidies, hike fees for govt services — Centre’s tips to states to slash deficit

At a meeting with chief secretaries of states, Union Finance Secretary T.V. Somanathan made a presentation that highlighted a worrying rise in debt in some states.

T.V. Somanathan, Union Finance Secretary | ThePrint

New Delhi: That the fiscal health of many Indian states is not robust — and their debt burden is holding them from spending on capital assets — is a known thing. But it has now pushed the Union government to raise the alarm and suggest material changes in the states’ spending to prevent a situation of default.

Union Finance Secretary T.V. Somanathan, at a meeting with chief secretaries of states in Dharamshala between 15 and 17 June, which was also attended by Prime Minister Narendra Modi, made a slew of suggestions to help states improve their finances. These included “rationalisation of schemes and autonomous bodies and measures to reduce inefficient subsidies”.

Some of the possible measures suggested by Somanathan to reduce states’ revenue deficit included periodic increase in property taxes, regularly raising fees for various government services like water, and periodically raising excise duty on liquor, among other things.

The recommendations were part of a presentation, which ThePrint has seen.

In 2021, the 15th Finance Commission, too, had stressed the importance of periodic increase in property tax rates by municipalities in line with inflation and growth.

These suggestions come on the back of the Reserve Bank of India (RBI) releasing a detailed study last month in which they highlighted at least 10 states that have witnessed a slowdown in their own tax revenue, a high share of committed expenditure and rising subsidy burdens, stretching their finances already exacerbated by Covid-19.

The highly stressed states, according to the study, are Bihar, Kerala, Punjab, Rajasthan, West Bengal, Andhra Pradesh, Jharkhand, Madhya Pradesh, Haryana and Uttar Pradesh. Most of these states have surpassed their debt levels as prescribed by the 15th Finance Commission.

‘Rationalise autonomous bodies, schemes’

During the presentation, Somanathan said that states must take a leaf out of the Centre’s book and implement some of the recent decisions taken by them last month.

He gave the example of the Union government taking up 231 autonomous bodies for detailed review. Following the review, in May 2022, a decision was taken to reduce 112 autonomous bodies through mergers, closures and disengagement, among other things.

The rationalisation, Somanathan said, would not only “cut unproductive administrative costs”, but also break “silos between organisations, which are supposed to cooperate with better outcomes and service to the public”.

“States may like to consider similar action for which leadership of chief secretaries will be crucial,” he added.

He said that breaking of silos between organisations which are supposed to cooperate, may lead to better outcomes and service to the public.

Similarly, the finance secretary suggested that “states may like to consider rationalisation of their own schemes into fewer but better schemes with lower administrative costs”.

He mentioned that, since 2016, out of 130 centrally sponsored schemes (CSS), 60 have been merged into larger initiatives and five have been closed.

This has reduced the number of CSS to 65. For instance, 10 schemes of the animal husbandry department have been merged into one — Rashtriya Pashudhan Vikas Yojana. This has been done so that states can use the funds flexibly, he said.

A CSS scheme is one where the expenditure is generally shared between the Centre and state in a 6:4 ratio.

In 2021, the 15th Finance Commission had also recommended gradually stopping the funding for those CSS and their subcomponents that have either outlived their utility or have insignificant budgetary outlays not commensurate to a national programme.

Reducing inefficient subsidies

Touted as a major step, Somanathan suggested that one of the options to reduce the states’ revenue deficit — when the government’s total revenue expenditure exceeds its total revenue receipts — is by reducing inefficient subsidies.

A subsidy is considered inefficient if it is poorly targeted, cannot recover any costs from the beneficiaries, and if it has side effects like pollution or excessive water consumption among others.

“Reduction in such subsidies will be a major step towards the long term financial health of states,” the finance secretary said in his presentation.

The Centre indicated free unmetered power to farmers as an example of an inefficient subsidy. It results in “financial losses and overdues, also leads to misuse, theft disguised as agricultural use, and excessive use of scarce water.

As a solution, the finance secretary suggested, “Metering, including prepaid metering, is a key step forward, even if concessions are given. Prepaid metering is another important step for which the power ministry provides financial assistance.”

The Aam Aadmi Party (AAP) government in Punjab was recently criticised for providing free power up to 300 units for all the households in the states, as that would create inefficiencies in the system and add to the state’s financial woes.

Worrying rise in debt in states

The presentation looked at state finances in detail and highlighted a worrying rise in debt in some states.

For instance, the annual rate of outstanding liabilities (excluding off-budget borrowings and power sector dues) between 2015 and 2020 was the highest in Telangana (30.6 per cent), followed by Chhattisgarh (22.5 per cent), Odisha (21.7 per cent), Arunachal Pradesh (20.9 per cent) and Tamil Nadu (19.2 per cent).

The outstanding liabilities as a proportion of the state’s GDP in 2019-20 was the highest for Nagaland at 47 per cent, and Arunachal Pradesh and Punjab at 43 per cent each. For some 21 states, the outstanding liability to GSDP or the states’ income was over 25 per cent in 2019-20.

Because 90 per cent of the state’s revenues are being used to fund revenue expenditure like salaries, pensions, subsidies in the form of freebies, it is preventing states from spending on capital creation, which has a higher multiplier effect on growth.

States like Punjab, Kerala, West Bengal and Maharashtra had spent only up to 10 per cent of their total budget outlay on capital expenditure between 2015-2020. This compared to the Centre’s outlay for capital expenditure at about 18 per cent of their total spending.

Among the better off, states Odisha spends 21.2 per cent of their total budget outlay on capital expenditure, Uttar Pradesh 18.5 per cent, Bihar 18 per cent, and Gujarat and Jharkhand 17.8 per cent.

(Edited by Zinnia Ray Chaudhuri)