Short term bounty

The piles of cash that some state governments are sitting on have become the focus of attention and comment. Officials at the Centre have suggested that cash-surplus states should use the money to increase expenditure, and the Prime Minister himself suggested that a new Pay Commission’s impact could be absorbed with the money available. A study by Subhash Garg at the National Institute of Public Finance and Policy (Mr Garg used to handle state finances at the finance ministry) puts the issue in perspective. While many states do show an improved fiscal picture, thanks partly to the sharp rise in collections following the imposition of a state VAT last year, Mr Garg’s analysis makes clear that the turnaround is not there for all the states taken together, nor is the phenomenon of cash surpluses a permanent one.

So how are states sitting on a pile of cash? Mr Garg shows that, till the end of January this year, states got an additional Rs 25,700 crore on account on increased tax devolution and increased grants, including Rs 12,000 crore on account of the Finance Commission’s recommendations. While the states lost out on Rs 12,000 crore of Plan loans that stopped this year, this was more than made up by increased flows from small savings. And since no money was held back by the Centre from small savings’ collections for the debt swap, states got additional small savings of Rs 20,000 crore, taking the net additionality to Rs 8,000 crore. Much of this, naturally, is not going to be repeated in 2006-07. For one, the Finance Commission-related transfers will shrink, and it is unlikely that small savings will show much more buoyancy if tax benefits go and the level of liquidity in the market remains as tight as it is right now. Mr Garg’s analysis is that if the fiscal deficit in 2006-07 remains at more or less this year’s level, the cash balances that the states are sitting on could get drawn down to less than Rs 10,000 crore by the end of 2006-07. Any suggestion that the cash with states should be used to finance expansionary fiscal policies is clearly ill-advised.

Some of the other figures in the analysis are equally relevant. The fiscal deficits for all states, for instance, are down from 4.3 per cent of the states’ GDP in 2000-01 to a projected 3.7 per cent for 2005-06. The revenue deficit is down from 2.6 per cent to 1.1 per cent in the same period. This is improvement, but only two states are in a revenue-surplus situation. Interest payments as a proportion of both GDP and revenue receipts remain stubbornly high—as a proportion of GDP, they have gone up from 2.48 to 2.68 per cent; and they are unchanged at 21.7 per cent of revenue receipts. On the whole, however, the need to seek temporary accommodation from the Reserve Bank has come down, from Rs 5,887 crore in 2001-02 to Rs 1,122 crore in the first eight months of 2005-06 (no data are available for subsequent months). During the same period, states have also invested more in T-bills, the numbers being Rs 2,733 crore in 2001-02 and Rs 33,491 crore till January this year