State finances: an A.R.M and a leg? | business | Hindustan Times
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State finances: an A.R.M and a leg?

As Finance Minister Pranab Mukherjee prepares for a balancing act between raising revenues and cutting expenditures in the upcoming Union Budget, states across the country are already bracing for a return to fiscal prudence, reports Abhijit Patnaik.

business Updated: Jun 22, 2012 11:27 IST
Abhijit Patnaik

As Finance Minister Pranab Mukherjee prepares for a balancing act between raising revenues and cutting expenditures in the upcoming Union Budget, states across the country are already bracing for a return to fiscal prudence.

Punjab plans to start billing farmers for the electricity they use, in what could be the beginning of a bold move to end decades of free power to agriculture. Haryana and Chattisgarh are looking to hike value added tax, while Assam wants a new tax of 1 per cent on vehicle registrations. In New Delhi, Shiela Dixit is toying with several ideas, including a “congestion charge” on vehicles entering the city.

The recourse to additional revenue mobilisation (ARM) is aimed at bringing order to their finances that had been hit as earnings shrunk amid an economic slowdown and spending spiked on account of, among other things, increasing salaries in line with the recommendations of the Sixth Pay Commission.

The states’ combined fiscal deficit is estimated to touch 3.2 per cent of gross domestic product in 2009-10, more than twice the level in 2007-08. Fiscal consolidation was given a pass for the current fiscal year because of the economic slowdown that required governments to spend more to spruce up demand.

In 2010-11, however, both the Centre and the states will have to start tightening their belts as the alarmingly high fiscal deficit could trigger another crisis.

On Thursday, the government will place an action taken report on the recommendations of the 13th Finance Commission.

The commission has suggested a new roadmap for reducing fiscal deficit and, if accepted, states will have to start enforcing it.

The ARMs by the states come after a long break, because the high economic growth between 2004 and 2008 left government s with buoyant tax collections.

“There was no such problem in funding expenditure because revenues were booming,” said Tapas Sen at the Delhi-based National Institute of Public Finance and Policy.

According to Sen, with an approximately 25 per cent hike in salaries and 40 per cent for pensioners, states like West Bengal, Himachal Pradesh and Uttaranchal are facing an uphill struggle.

Tamil Nadu’s payments to employees grew from Rs 21,000 cr to Rs 26,000 cr in 2009 as a result of this.

“The pay commission recommendations have particularly hit poorer states hard,” said NJ Kurian, who was formerly the head of the financial resources division at Planning Commission.

Pressure from the Planning Commission to meet plan targets has also raised the need to mobilize resources. For example, the National Rural Employment Guarantee Scheme has shown a steady increase in workers asking for entitlements, putting further pressure on state finances.

Unless the states raise their share of the total costs of these projects, they are not eligible for central assistance, which means either losing out on crucial projects, or resorting to measures such as tax hikes to try and meet their shares.

Some states are holding back, however. West Bengal doesn’t want to bring new taxes because the state is headed for elections next year.

Orissa has no such plans either. “People are already burdened with rising prices of essential goods,” finance minister Prafula Ghadei told Hindustan Times. “So we have decided against ARM”.