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Fiscal Space with States and the Sixth Pay Commission

This article estimates the fiscal space available with the state governments, in case they implement the Sixth Central Pay Commission recommendations. It prepares base case estimates for the fiscal space based on liberal and plausible assumptions and shows that most of the states have the space to incur the estimated additional expenditure. Some states are likely to face difficulties in the initial one or two years. However, they can consider several options to overcome the problem.

COMMENTARY

Fiscal Space with States and the Sixth Pay Commission

Ravindra H Dholakia, Astha Govil

financial crisis and negative performance caused by such a burden. Therefore, it was included in the terms of reference of the SCPC to examine this aspect as well. The SCPC examined this aspect only for the 20 states that adopted the Fifth CPC recommendations by considering the proportion

This article estimates the fiscal space available with the state governments, in case they implement the Sixth Central Pay Commission recommendations. It prepares base case estimates for the fiscal space based on liberal and plausible assumptions and shows that most of the states have the space to incur the estimated additional expenditure. Some states are likely to face difficulties in the initial one or two years. However, they can consider several options to overcome the problem.

Ravindra H Dholakia (rdholkia@iimahd.ernet.in) teaches at the Indian Institute of Ahmedabad and Astha Govil (asthag@iimahd.ernet.in) is a doctoral student at IIM, Ahmedabad.

T
he Sixth Central Pay Commission (SCPC) submitted its report to the central government on March 24, 2008. As per their report, acceptance of their recommendations will impose an additional annual burden of Rs 12,561 crore on the central government in the year 2008-09 – Rs 9,242 crore on the central budget and Rs 3,319 on the railway budget. Moreover, arrears of Rs 18,060 crore are also estimated to arise with the recommended date of implementation being January 1, 2006. Out of this one-time additional expenditure, Rs 12,642 crore will have to be absorbed in the central budget and Rs 5,418 crore in the railway budget. Considering additional annual savings of Rs 4,586 crore on account of various recommendations, the net burden on the central government is likely to be about 0.4 per cent of the gross domestic product (GDP). Since both the railway and finance ministers have provided the necessary “headroom” in their respective budgets for 2008-09 remaining within the Fiscal Responsibility and Budget Management (FRBM) Act constraint, there are no serious concerns for the required fiscal space with the central government in case they decide to implement the recommendations.

Based on the past experience, many of the state governments are also expected to follow these recommendations. However, there are concerns and apprehensions raised on the availability of the fiscal space necessary to implement the recommendations of the SCPC especially when 26 out of the 28 state governments have already passed the FRBM Act in one or the other form. (Only West Bengal and Sikkim are yet to follow.) These apprehensions derive support from the past experience of 20 out of the 28 state governments which adopted the Fifth CPC recommendations. It took years for these states to come out of the of the wage-bill and pension-bill in the total revenue receipts in the state budget in the years 2005-06 and 2006-07 and whether this average ratio gets exceeded in the subsequent years if the recommendations were fully adopted by the state in question [Srikrishna et al 2008: 24-27]. However, this method per se may not address the concerns about the fiscal space available with all states.

State FRBM legislation puts stringent targets for the states in terms of the gross fiscal deficit (GFD) and revenue deficit (RD) and debt as proportions of the state income gross state domestic product (GSDP). In order to achieve these targets, states have to curtail expenditure and/or increase revenue. The likely impact of the SCPC recommendations on the fiscal condition of each of the states needs to be assessed in terms of its capacity to implement the pay hikes in the light of fiscal targets imposed by its FRBM Act.

The present note focuses on estimation of available fiscal space to implement the additional expenditure required by the SCPC, simultaneously achieving the FRBM targets. The present study estimates the future revenue and expenditure of the states, based on liberal and plausible assumptions, and projects the primary deficit states would incur during the period 2006-2012. Similarly, primary deficit targets for the states are obtained as per their respective FRBM Acts. A comparison of projected and targeted primary deficit provides a measure of the fiscal space available with the states, consistent with their FRBM initiatives. A positive fiscal space indicates that the state is maintaining the desired discipline and would be able to implement at least some pay-hike. However, states with a negative fiscal space show fiscal problems and, therefore, would not be able to achieve even their FRBM targets. These states will have to implement further expenditure control

May 10, 2008

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Economic & Political Weekly

COMMENTARY

and/or revenue augmentation even to meet their FRBM targets leave alone any extra expenditure if recommendations of the SCPC were adopted by them.

The next step is to generate broad estimates of the extra fiscal burden on the states if they implemented SCPC recommendations. This extra fiscal burden for different states is then compared with their respective fiscal space estimates to derive the likely impact of the SCPC recommendations on the state finances within the given efforts to achieve FRBM targets.

The period for the forecast is 2006-12, covering the period of 11th Five-Year Plan (FYP), with 2006-07 revised estimates for the states taken as the base. Data for state budgets is obtained from State Finances – A Study of State Budgets, published by RBI.

Projected and Targeted Deficits

Fiscal space is calculated as the difference between the targeted Primary Deficit (PD) as per FRBM requirements and projected PD as per the base case.

Fiscal Space(t) = Targeted PD(t) – Projected PD(t) ...(1)

Projected Primary Deficit for a year (PD)

t

is defined as the difference between gross fiscal deficit (GFD) for the year and inter

t

est payments (Int) in the year.

t

= GFD(t) – Int(t) ...(2)

PD(t)

For calculating GFD for states, RBI defines

t

it as the difference between revenue expenditure (RE) and Revenue Receipts

t

(RR) plus the capital outlay (CO) and net

tt

lending (NL, i e, lending by state govern

t

ments – recovery of loans)

tt

GFD(t) = (RE(t) – RR(t)) + CO(t)

+ NL(t) ...(3)

We define Primary Expenditure (PE) as

t

the sum of REt, CO and NL net of Int

ttt.

= (RE(t) – Int(t)) + CO(t)

PE(t)

+ NL(t) ...(4)

Therefore PD can be rewritten as, using

t

equations 2, 3 and 4

= PE(t) – RR(t) ...(5)

PD(t)

This definition of PDt is used to obtain PDt projections using PE and RR estimates. Interest payments are estimated by calculating Effective Interest Rate (EIR) and

Economic & Political Weekly

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may 10, 2008

applying them to the estimates for total debt (TD). TD is defined as the sum of TDt-1

tt

and GFDt.

= TD(t–1) + GFD(t) ...(6)

TD(t)

Int are obtained by using the relationship

t

below

Int(t) = EIR*TD(t–1) ...(7)

Targeted PD(t) is obtained from the FRBM targets for every state, given in terms of desired GFD as a percentage of GSDP. From this ratio, the desired absolute level of GFD is calculated and using equation (2) the targeted PD(t) is derived.

Equation 2 is then applied to estimate the fiscal space for 28 states, using these targeted and projected primary deficit estimates.

Base Case Estimation

Base case estimation is based on liberal assumptions for fiscal behaviour of states in order to measure the maximum fiscal space available. Projections for future revenues and expenditures for the states are based on their behaviour in the recent past, in order to capture any recent fiscal initiative implemented by the states. The procedure used for estimating revenue receipts, primary expenditure, total debt and interest payments by the states for the period 2006-12 is described below.

Revenue Receipts: Revenue receipt forecasts are made separately for different components like tax revenue and non-tax revenue. Tax revenue of a state is composed of two major sources, Own Tax Revenue (OTR) and share in central taxes. Similarly, non-tax revenue comprises of Own Non-Tax Revenue (ONTR) and grants from the centre (plan and non-plan grants combined). Different approaches are taken for obtaining forecasts for each of these components.

For the first component, i e, OTR, year on year growth rate in OTR/GSDP ratio for each state for all the years during the period 2005-12, is taken from the report of 11th FYP sub-committee on tax resources. These estimates are based on a time series analysis of major taxes for states. Electricity duty, state excise duty, stamp and regis tration fee, transportation taxes and sales taxes are considered separately by the committee, rest all the taxes are clubbed into “other taxes” category, since their contribution is negligible in total state revenues. Total increase in OTR is measured as the sum of increases in all these taxes. Professional tax is kept out of this calculation to begin with, as it is not buoyant by nature.

These estimates of changes in the yearwise and category-wise tax-GSDP ratios are then applied on respective 2006-07 (RE) tax/GSDP ratios to obtain the projected tax ratios in each state for the subsequent period. For calculating absolute levels of OTR, GSDP estimates were obtained by using growth rate targets assigned by 11th FYP to each state. These growth targets are in real terms. Therefore an inflation rate of 4 per cent is added to these targets to obtain the nominal growth targets for each of the states, and it is assumed that the GSDP of the states will continue to increase at this rate for the future years. Assumption of 4 per cent inflation rate is taken from 11th FYP documents. This assumption is a conservative one, because the present expectation of inflation is around 5 per cent for the initial years of 11th FYP and is expected to decline gradually to 4 per cent over the period.

For professional tax receipts, a growth rate of 3 per cent is assumed, based on the recommendations of 11th FYP subcommittee on tax resources of states.

For forecasting the share of states in the central taxes, each state’s share in the central taxes is obtained from 12th Finance Commission (TFC) report. These shares are assumed to remain constant for the entire forecasting period (2007-12). Buoyancy estimates for all central taxes are taken from TFC, and assuming nominal GDP growth rate of 13 per cent, growth rates for all the taxes are calculated. These growth rates are, then, applied to the central government budget estimates for the year 2006-07 (RE) to forecast central government revenues. Corporate tax, income tax and service tax show high growth rates of 22.1 per cent, 18.2 per cent, and 22.75 per cent respectively as per the TFC estimates. Customs duty and union excise duty are expected to grow at a relatively lower rate, 7.8 per cent and 11.7 per cent respectively.

COMMENTARY

ONTR estimates for all states are obtained by applying CAGR taken from the report of the sub-committee on resources other than taxes for 11th FYP. These CAGR figures are for the period 1993-2005. Although these CAGR estimates based on such longer time period may tend to understate and not represent the true recent picture of trends in ONTRs of states, we used them to remain on conservative side. A more realistic way would have been to come up with our own CAGR estimates for state ONTR growth rate estimated over a relatively shorter period or consider the potential of this source to generate higher state revenues through revision of user charges and cost recovery as suggested in some studies [Archana Dholakia 2000]. If a state does not show fiscal space, it can consider raising additional revenues through this source. The CAGR estimates are applied on 2006-07 (RE) figures to obtain future forecasts of ONTR for all the states.

CAGR for the period 2002-06 for grants from the centre is calculated for each state, and applied on 2006-07 (RE). A longer period for calculating CAGR is avoided so that the recent trend in grants received by states can be captured.

Primary Expenditure: Revenue expenditure, interest payments, capital outlay and net lending figures for the years 2002-03 to 2006-07(RE) are obtained from the RBI publication on state finances. Primary expenditure is calculated for these years using equation 3. CAGR of primary expenditure for the period 2002-06 is calculated for each state. It is assumed that primary expenditure will grow at the lower of the CAGR of the PE so calculated and the target growth rate of nominal GSDP for the respective state as set by the Planning Commission. This assumption ensures that the states are not forced into accepting any harsh expenditure contraction over what they have already been following in the recent past or maintaining the PE in constant proportion to the state income.

Total Debt: Estimates for total liabilities of the states at the end March 2007 are obtained from RBI’s State Finances. Total debt estimates for future are then obtained by using equation 5. GFD estimates from the year 2007-08 onwards are calcu-enactment to the target year. Some of the lated using equation 1. states have already achieved a lower GFD/

GSDP ratio than the target in the year Interest Expenditure: For deriving vari-2006-07 like Chhattisgarh, Gujarat, ous components of debt for the future Haryana, Karnataka, Meghalaya, Orissa years, the debt structure prevailing as per and Tamil Nadu. Therefore for all states, 2006-07 (RE) figures is maintained. In lower of the actual and targeted GFD/GSDP order to estimate the effective interest ratios is assumed to be maintained, startrate, total debt was classified under 4 ing from the year 2006-07. broad categories, namely, loans from For West Bengal and Sikkim a target centre, internal debt, provident fund and of 3 per cent is assumed, as per the small savings and other liabilities. Inter-national FRBM target. nal debt consists of market loans, national Some of the states like Himachal small saving fund (NSSF) and other sourc-Pradesh and Maharashtra have not species such as loans from banks and financial fied the target in terms of desired GFD/ institutions, power bonds, etc. GSDP ratio. For these states also, a target

Effective interest rates for each compo-of 3 per cent GFD/GSDP is assumed. nent of the debt are derived for each state, based on 2005-06 and 2006-07 data. Fiscal Space with States These are then applied to the estimates of Results of the estimation exercise are total debt to obtain the interest payments, presented in Table 1. A positive fiscal space using equation 7. shows comfort of the state in achiev-

For all components of debt except mar-ing FRBM targets, as the actual base case ket loans, the interest prevailing in the level of primary deficit is lower than that year 2006-07 is assumed to continue in required to meet the FRBM targets. the future. However, for market loans, it is It is evident from Table 1 that in the base assumed that interest rate on them de-case scenario, except Jharkhand, Kerala creases by 0.2 per cent Table 1: Estimated Fiscal Space without 6th CPC (Rs Crore)

each year, till 2011-12. S N State 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
This assumption is based on the observa 1 2 3 Andhra Pradesh Arunachal Pradesh Assam 64 0 0 -1,857 -20 0 456 226 1,918 1,948 407 3,740 3,889 641 6,275 7,053 1,009 10,626 11,114 1,471 16,453
tion of interest rates de 4 Bihar 0 -3,288 -577 1,275 4,677 9,454 16,069
clining for almost all states for the past two to 5 6 7 Chhattisgarh Goa Gujarat 0 0 5 0 -94 0 1,202 56 1,677 2,415 245 3,452 4,005 645 5,759 6,077 1,177 8,723 8,760 1,873 12,494
three years. 8 Haryana 17 0 356 765 1,282 1,932 2,745
9 Himachal Pradesh 44 -242 556 1,335 2,328 3,575 5,127
FRBM Targets 10 11 J and K Jharkhand 0 0 -2 -27 204 -1,398 324 -3,564 473 -3,940 940 -4,252 1,505 -4,465
Out of 28 states, all have 12 Karnataka -10 0 1,848 3,484 5,620 8,412 12,065
enacted the FRBM Acts 13 Kerala -17 -5,631 -5,524 -5,481 -5,167 -4,463 -3,208
till now, except West 1415 Madhya Pradesh Maharashtra 0 -4,658 195 -948 3,604 2,897 5,758 9,257 7,626 19,977 11,836 37,563 17,525 65,894
Bengal and Sikkim. In 16 Manipur -102 -39 338 781 1,354 2,090 3,029
order to estimate the 17 Meghalaya 0 0 173 356 588 877 1,236
targeted primary defi 1819 Mizoram Nagaland 0 0 -67 -93 -29 -20 0 37 135 185 310 383 535 642
cit for each state, the 20 Orissa 0 0 1,149 2,391 3,984 6,015 8,588
FRBM targets are taken from RBI publication on 212223 Punjab Rajasthan Sikkim 0 0 -96 -2,114 181 -141 -544 703 20 1,650 1,210 135 4,837 2,567 285 9,404 4,315 479 15,886 6,549 726
state budgets, in terms 24 Tamil Nadu 0 -76 928 1,692 2,613 3,725 5,070
of desired GFD/GSDP ratio. GSDP estimates were 25 Tripura 27 Uttarakhand 26 Uttar Pradesh 0 0 0 0 -158 -236 135 43 5,609 227 235 11,463 355 1,126 20,756 611 2,288 33,345 938 3,785 50,387
used to find out the de 28 West Bengal -2,521 -3,784 -2,086 -333 2,131 5,497 10,005

Source: See the text for method and basic sources of data.

sired absolute level of fiscal deficit and then using equation 2, and West Bengal, all the states show a positargeted primary deficit is calculated. tive fiscal space in the year 2008-09 with-

For all states, desired GFD/GSDP ratio out 6th CPC. Out of these three states, West over years is calculated by assuming equal Bengal shows positive fiscal space from the reduction in the ratio from the year of next year 2009-10 onwards. Kerala shows

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Economic & Political Weekly

COMMENTARY

declining negative space over the 11th Plan situation in the base case scenario without 2008-09 to 2011-12, so esti mated for each period though the rate of decline is very considering the SCPC recommendations state is presented in Table 2. slow. It is only Jharkhand which poses a on pay and pension. It is evident form the table that all the major problem of increasing – almost ex-states will face a heavy additional burden ploding negative fiscal space over the 11th Impact of Recommendations in the first two years, i e, 2008-09 and Plan period. However, we need to appreci-In order to estimate the incremental 2009-10 compared to the subsequent two ate that these results are based on our as-impact of the acceptance of recommenda-years. This is because we have assumed sumptions about the future growth of pri-tions of the SCPC by states, we have as-that the arrears will be paid in two equal mary expenditures and revenue receipts of sumed that (i) the implementation will annual instalments in the first two years the states. Our assumption regarding pri-start in 2008-09, (ii) percentage increase of implementation of the award. It will be mary expenditures is very liberal in nature, in the pay, allowances and pensions will be interesting to see, therefore, the net fiscal

similar as in the centre, (iii) revision space with the states if they were to imple-

Table 2: Additional Fiscal Burden due to

6th CPC Recommendations (Rs Crore) in pay and pensions will apply ment the SCPC recommendations in totality.

S N State/Year 2008-09 2009-10 2010-11 2011-12 retrospectively with effect from Jan-P&P Arrears P&P Arrears P&P P&P

uary 1, 2006, and in allowances from Fiscal Space after Implementation

1 Andhra Pradesh 2,348 1,021 2,489 1,021 2,638 2,796

prospective date of actual implemen-Our earlier discussion on fiscal space was

2 Arunachal Pradesh 77 34 82 34 87 92 3 Assam 807 379 856 379 907 962 tation, and (iv) distribution of arrears in the light of FRBM requirements and our 4 Bihar 1,470 671 1,558 671 1,652 1,751

will be similar as at the centre. It may objective was to find out the abilities and

5 Chhattisgarh 574 239 609 239 645 684

be noted that states have considera-comfort of the states to achieve their res

6 Goa 97 42 103 42 109 115 7 Gujarat 1,204 545 1,276 545 1,353 1,434 ble degrees of freedom in modifying pective FRBM targets. With the burden of 8 Haryana 759 332 804 332 852 903

these assumptions. In that case, the implementation of the SCPC recommen

9 Himachal Pradesh 486 216 515 216 546 579

impact could be substantially dif-dations, states will have to devote some

10 Jammu and Kashmir 690 317 731 317 775 821 11 Jharkhand 565 246 599 246 635 673 ferent for those states. This is a extra resources in meeting the pay and 12 Karnataka 1,566 645 1,660 645 1,759 1,865

matter of autonomy of state govern-pension expenditures. The impact of imple

13 Kerala 1,777 778 1,884 778 1,997 2,117

ments and their discretion and, mentation of the SCPC recommendations

14 Madhya Pradesh 1324 565 1,404 565 1,488 1,577 15 Maharashtra 4,265 1,864 4,520 1,864 4,792 5,079 therefore, no separate estimates are on the fiscal space is estimated for all the 16 Manipur 137 62 145 62 154 163

attempted here.

17 Meghalaya 115 47 122 47 129 137 Table 3: Net Fiscal Space with States after Sixth CPC

The increase in pay and pension

18 Mizoram 109 47 115 47 122 129 Recommendations (Rs Crore) 19 Nagaland 175 76 185 76 196 208 expenses in different states as per the S N State 2008-09 2009-10 2010-11 2011-12 20 Orissa 969 419 1,027 419 1,089 1,154 1 Andhra Pradesh -1,420 379 4,415 8318

SCPC recommendations is worked out

21 Punjab 1,149 495 1,218 495 1,291 1,368 2 Arunachal Pradesh 296 526 922 1,379

assuming similar percentage as at

22 Rajasthan 1,400 610 1,484 610 1,573 1,667 3 Assam 2,554 5,041 9,719 15,491 23 Sikkim 64 29 68 29 72 76 the centre in the year of implementa-4 Bihar -866 2,448 7,803 14,318 24 Tamil Nadu 2,779 1,177 2,946 1,177 3,123 3,310 Chhattisgarh 3,158 8,076

tion, i e, 2008-09. As for the subse-5 1,602 5,431

25 Tripura 216 97 229 97 242 257 6 Goa 106 501 1,069 1,758

quent years, this increase is com

26 Uttarakhand 413 174 438 174 464 492 7 Gujarat 1,703 3,938 7,371 11,060 27 Uttar Pradesh 2,342 1,031 2,482 1,031 2,631 2,789 pounded at the rate of 6 per cent per 8 Haryana -325 146 1,080 1841 28 West Bengal 2,052 920 2,175 920 2,306 2,444 9 Himachal Pradesh 633 1,597 3,029 4,548

annum to get the incremental impact

Source: See the text for method and basic sources of data. 10 Jammu and Kashmir -682 -574 165 684

of the recommendation of the SCPC.

11 Jharkhand -4,375 -4,786 -4,888 -5,138 as we have assumed that primary expendi-This is because, as per our base case sce-12 Karnataka 1,273 3,316 6,653 10,200

13 Kerala -8,036 -7,829 -6,460 -5,324

ture will grow at the lower rate among nario presented above, the pay and pen

14 Madhya Pradesh 3,869 5,657 10,348 15,947

CAGR based on last four years and the nom-sion expenditure of states, being a part of

15 Maharashtra 3,129 13,593 32,772 60,815 inal GSDP growth target derived by assum-the primary (i e, non-interest) expendi-16 Manipur 581 1,146 1,936 2,866

17 Meghalaya 194 419 748 1,099

ing 4 per cent inflation to the real growth tures, would also grow in future without

18 Mizoram -156 -27 188 406

rate targets given by 11th FYP for each state. the SCPC recommendations being imple

19 Nagaland -213 -76 187 434 This assumption allows the real expendi-mented. The additionality of the SCPC is 20 Orissa 1,003 2,538 4,926 7,434

21 Punjab 6 3,125 8,113 14,518

ture to grow, at the rate of growth of real only what we have considered here. More

22 Rajasthan -800 473 2,742 4,882

GSDP, which is quite high for all the states, over, the arrears arising out of the retro

23 Sikkim 42 188 407 649 given the good performance by all states in spective implementation of the pay and 24 Tamil Nadu -2,264 -1,510 602 1,760

25 Tripura -86 29 368 681

the 10th FYP period. The states facing the pension hike from January 1, 2006 are

27 Uttarakhand -352 514 1,824 3,293

fiscal problem need to consider pruning also estimated for different states taking

26 Uttar Pradesh 8,090 17,243 30,714 47,598 their primary expenditures somewhat to the same percentage as at the centre and 28 West Bengal -3,305 -964 3,192 7,560

Source: Tables 1and 2.

overcome the problem. distributed again over the two years

Thus, only two states, viz, Jharkhand equally as in the case of the centre. The states by subtracting the incremental fisand Kerala have problems in achieving estimates for the total pay and pension ex-cal burden in Table 2 from the available their respective FRBM targets even with-penditure (TPPE) for various state govern-fiscal space in Table 1 for each state in all out the SCPC implications. Other states ments are taken from RBI (2007).1 Fiscal the four years – 2008-09 to 2011-12. These are in a reasonably comfortable fiscal burden of the SCPC over four years from estimates provide the idea of the comfort

Economic & Political Weekly

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may 10, 2008 19

COMMENTARY

level of states in terms of meeting their FRBM targets after implementing the SCPC recommendations. These estimates are provided in Table 3.

The estimate of fiscal space left after implementing the SCPC recommendations shows that major change has been observed in the fiscal space situation in several states especially in the first two years of the possible implementation of the SCPC. Jharkhand, Kerala and West Bengal were the states having a negative fiscal space in the base case scenario in the year 2008-09. Now we find Andhra Pradesh, Bihar, Haryana, Jammu and Kashmir, Mizoram, Nagaland, Rajasthan, Tamil Nadu, Tripura, Uttarakhand and West Bengal also join their rank if they implement all the SCPC recommendations. Rest all the other states are well in line of the FRBM commitments even after incurring the additional expenditure implied by SCPC. What is interesting from Table 3 is that such a disturbance is only for one year in several states like Andhra Pradesh, Bihar, Haryana, Rajasthan and Uttarakhand. After two years only Jharkhand and Kerala show negative fiscal space with the former exploding and the latter slowly improving. All other states become again fiscally comfortable achieving their FRBM targets and also implementing the pay and pension revision as per the SCPC recommendations. In order to remain conservative in our approach, we have not considered any savings that may arise due to the implementation of the SCPC recommendations, e g, loans to employees, efficiency gains, etc.

Conclusions

Our results suggest that implementing the SCPC recommendations will not be fiscally difficult for 15 out of 28 state governments without causing any sacrifice on their FRBM requirements. Out of the remaining 13 states, six would experience difficulty in meeting their FRBM targets only in the first year, i e, 2008-09. From among the other seven states, five would be able to meet their FRBM targets from 2010-11. Out of the 28 states, only two, viz, Jharkhand and Kerala, will have problems in meeting their FRBM targets even after 2009-10, but these were the states having fiscal problems of meeting their FRBM targets in any case – if they implemented the recommendations or not. Thus, implementation of the SCPC recommendations can derail six states from their FRBM discipline path for one year and another five states for two years. However, this assumes that all these states follow all the recommendations regarding the date of effect (i e, January 1, 2006), payment of arrears in only two instalments and that too equal ones, etc. On the other hand, eight states (Andhra Pradesh, Assam, Himachal Pradesh, Karnataka, Kerala, Meghalaya, Punjab and West Bengal) did not adopt the Fifth CPC recommendations and several of the others, who adopted, made suitable modifications.

The states should consider their fiscal position in the context of their FRBM targets and introduce necessary modifications in deciding the date of effect and/or staggering payment of arrears to suit their available fiscal space in the first two years of implementation. Most of the state governments have shown fiscal discipline in the past few years and their fiscal position, therefore, is comfortable to implement the 6th CPC recommendations, provided they continue with their discipline. For the remaining states desirous of implementing the SCPC recommendations and facing difficulties in achieving their FRBM targets either in the short run or in the long run, the other obvious options are : (i) increase their non-tax revenues by improving the cost recovery, (ii) increase their tax revenues if there is any scope, (iii) reduce the growth of their primary (non-interest) expenditure, or (iv) postpone the FRBM targets by one or two years as the case may be.

Note

1 For Punjab, the estimates are obtained from the web site of government of Punjab. For Meghalaya, it is assumed that salary expenditure as a proportion of primary expenditure will be the same as that in Assam. For Gujarat, since the RBI figures are substantially lower than those on the Gujarat government web site, the latter are considered for being conservative.

References

Dholakia Archana (2000). ‘Fiscal Imbalance in Gujarat

– Non-Tax Revenues and Subsidies’, Economic & Political Weekly, August 26-September 8, pp 3217-27.

RBI (2004): Handbook of Statistics on State Government Finances, Reserve Bank of India.

  • (2005): State Finances – A Study of Budgets of 2005-06, Reserve Bank of India.
  • (2006): State Finances – A Study of Budgets of 2006-07, Reserve Bank of India.
  • (2007): State Finances – A Study of Budgets of 2007-08, Reserve Bank of India. UB (2007-08): Union Budget – 2007-08, Ministry of Finance, Government of India.
  • 11th FYP (2007): Report of the 11th Five-Year Plan Subcommittee on Tax Resources of States, Planning Commission, Government of India.

  • (2007b): Report of the 11th Five-Year Plan Subcommittee on Resources Other Than Taxes for States, Planning Commission, Government of India.
  • (2007c): 11th Five year Plan – Approach Paper, Planning Commission, Government of India.
  • Srikrishna, B N, Ravindra H Dholakia and Sushama Nath (2008): Report of the Sixth Central Pay Commission, Government of India, New Delhi, March.

    TFC (2005): Report of the Twelfth Finance Commission, Ministry of Finance, Government of India.

    Professor M. N. Srinivas Memorial Prize 2008

    The Professor M. N. Srinivas Endowment Fund was jointly set up by the Indian Sociological Society and the Indian Council of Social Science Research in 2001. This Fund has instituted a prize for young sociologists/social anthropologists for publishing the best sociological/social anthropological paper in any of the social science journals/ edited volumes, in English, in India. The prize will carry a sum of Rs. 2,000.

    Papers published during 01 January 2005-31 December 2007 are eligible for consideration. The authors, who are life members or ordinary members of the Society with at least one year’s standing, will be eligible for the contest. The author must be 40 years or less in age on 31 December 2007. If the paper is co-authored, all the authors must be 40 years or less in age on 31 December 2007. The authors will submit only one paper for consideration.

    A reprint of the paper along with photocopies of the title page of the journal/edited volume and age proof must reach the office of Indian Sociological Society on or before 31 August 2008. The typewritten/handwritten/computer print-out manuscript will not be accepted. Besides the authors, other scholars are also welcome to bring suitable papers to the notice of the selection committee for consideration.

    Indian Sociological Society, Institute of Social Sciences, 8 Nelson Mandela Road, Vasant Kunj, New Delhi 110 070

    May 10, 2008

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