Govt finances likely to come under pressure, warns RBI

Mumbai, Sep 04, 2008 (Asia Pulse Data Source via COMTEX) -- BKIAF | Quote | Chart | News | PowerRating -- The Reserve Bank of India (RBI) today warned that finances of the Central Government may come under pressure this fiscal due to implementation of recommendations of the Sixth Pay Commission, higher oil prices, fertiliser subsidies and farm-loan waiver.

"The finances of the Central Government may come under pressure during 2008-09 on account of implementation of the Sixth Pay Commission award including payment of arrears, higher oil subsidies, increase in fertiliser subsidy due to a sharp rise in the price of raw materials and fertiliser in the international market," the RBI said in its report on Currency and Finance 2006-08.

The expenditure on account of debt waiver to farmers would also add to pressure on the Government, the RBI said.

Although this fiscal's Budget has met the Fiscal Responsibility and Budget Management (FRBM) target of annual reduction of 0.5 per cent of GDP in the revenue deficit, it was still placed at 1 per cent of GDP due to increased expenditure on health and education.

On state finances, the RBI report said all states except Sikkim and West Bengal had enacted the Fiscal Responsibility Legislation (FRL) till March-end. All states have also implemented value-added tax (VAT) in lieu of sales tax, it said.

Budgetary allocations for productive sectors such as agriculture and water conservation, infrastructure, power, urban development and housing sectors are proposed to be raised this fiscal in a number of states, it said.

The consolidated revenue surplus of states is estimated at Rs 28,426 crore (0.54 per cent of GDP) in 2008-09 as compared with Rs 22,526 crore (0.48 per cent of GDP) in 2007-08, the RBI report said. The consolidated primary deficit is budgeted at 0.1 per cent of GDP in 2008-09, the same as in the previous year.

The improvement in the revenue account during 2008-09 is budgeted to be mainly achieved by an increase in revenue receipts, which would emanate from increase in shareable taxes, States' own tax revenue and grants from the Centre.

The improvement in the revenue account would also be facilitated by deceleration in revenue expenditure, particularly in interest payments and pension.

"It is important to note that the developmental expenditure is budgeted to decelerate in 2008-09, while non-developmental expenditure is budgeted to accelerate," the RBI report said.

In all, 25 State Governments have budgeted revenue surplus during this fiscal. Further, 17 of them have budgeted GFD-GSDP ratio at 3 per cent or less.

"As the State Governments come closer to meeting the objective of reduction in deficit indicators, the States need to place strong emphasis on sustaining this progress in the post-FRL period," the RBI report said.

"It would be important to generate adequate fiscal space through revenue augmentation that could be utilised for financing developmental expenditure," it added.

The RBI report said that states can price the range of services that they provide "only by improving the quality of delivery of services." While the fiscal consolidation efforts have enabled a reduction in key deficit indicators, the level of States' outstanding liabilities continue to remain high as compared with many emerging and developing countries, the RBI report said.

Although there has been some reduction in the debt-GDP ratio due to debt consolidation and relief measures, the States continue to hold a large chunk of high-cost debt. A few states have pre-paid high cost debt on account of comfortable cash balance position.

The States also need to factor in the impact of higher staff remuneration based on the recommendations of the Sixth Pay Commission.

They may incur revenue losses due to lower tax devolution on account of reduction of excise and customs duties on petroleum products by the Centre.

Besides, reduction of sales tax on these products by some states might also affect them.

"In the near future, State finances would be shaped by the recommendations of the 13th Finance Commission that was set up in November 2007 and the implementation of the Goods and Services Tax (GST) scheduled from April 1, 2010," it said.

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