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Students Corner - A Decade of Economic
Reforms in India - A Review

Measures initiated by the States may be broadly grouped under revenue mobilisation, expenditure containment, public sector restructuring and institutional reforms. In addition to States’ own efforts, the Centre has also taken initiatives to strengthen the reform process at the State level. Further, the policy initiatives undertaken by the Reserve Bank have a bearing on State finances as well. These measures are reviewed next.

(i) Tax Reforms

Recognising the need for strengthening their finances, States have initiated measures towards enhancement/restructuring of various taxes within their fold, such as, land revenue, vehicle tax, entertainment tax, sales tax, betting tax, electricity duty, tax on trades, professional tax and luxury tax. It was recognised that competitive sales tax reductions by States aimed at attracting investment led to revenue losses without commensurate gains. With a view to harmonising inter-State taxes and ultimately switch over to State-level value added tax (VAT), States introduced uniform floor rate during 2000. Currently, preparations are underway for the introduction of Value Added Tax (VAT) in April 2003.

(ii) Non-tax Measures

States have also undertaken measures to enhance non-tax revenues by reviewing/rationalising the royalties payable to them, including those on major and minor minerals, forestry and wildlife, revision of tuition fees, medical fees, irrigation water rates and tariffs on urban water supply. The issue of raising user charges commensurate with the cost of public services rendered, however, has not been given serious consideration yet. Recognising this aspect, the Medium Term Fiscal Reform Programmes finalised by several States have emphasised the cost effectiveness and raising of user charges of services rendered by them.

(iii) Expenditure Management

The State Governments’ measures to contain expenditure inter alia, include restrictions on fresh recruitment/creation of new posts, review of manpower requirements and cut in establishment expenses and reduction in non-merit subsidies through better targeting.

(iv) Public Sector Restructuring

Several States have shown interest in undertaking a comprehensive review of the functioning of the State Public Sector Undertakings (SPSUs), including the possibility of closing down of non-viable units after providing for suitable safety-nets to the employees including VRS. States such as Tamil Nadu, Kerala, Haryana, Karnataka, Himachal Pradesh, Goa and Orissa have encouraged private sector participation in the transport and power generation sectors. In their recent budgets (2002-03), Karnataka has come out with a Policy Paper on restructuring of SPSUs, while Maharashtra has introduced a Bill for setting up a Board for Restructuring of the SPSUs. In order to strengthen the administrative machinery, many States have initiated measures to computerise their records as well as their day-to-day functioning.

Several States have also initiated measures to reform the power sector, which is crucial for the fiscal reforms. The main objective of these reforms was to mobilise private sector resources for augmenting power generating capacity. The additional capacity through independent power producers has, however, been far short of expectations. Recognising the need for transmission and distribution reforms, 21 States, have either constituted or notified the constitution of State Electricity Regulatory Commission (SERC).2 A majority of these States have also proposed to unbundle or corporatise the SEBs. One of the major tasks being entrusted to SERCs is to rationalise tariff rates. Further, 20 States have signed Memorandum of Understandings (MoUs) with the Union Ministry of Power to undertake reforms in a time-bound manner.

(v) Institutional Reforms

The institutional reforms undertaken by the States are also aimed at facilitating the fiscal consolidation process. Four States have initiated proposals to provide statutory backing to the fiscal reform process through enabling legislation. While Karnataka has already enacted the Fiscal Responsibility Bill in August 2002, Maharashtra and Punjab have introduced Fiscal Responsibility Bills in their legislatures. The Kerala Government has also proposed to introduce a Fiscal Accountability Bill.

In recent years, initiatives have been taken by some States to enhance transparency of budgetary operations. The Core Group on Voluntary Disclosure Norms for State Governments submitted its report in January 2001. The transparency in State budgets is sought to be enhanced in stages and a model format of the disclosure norms has been prescribed for the States by the Group. The States are being sensitised to the principle of transparency in Government operations so as to ensure macro fiscal sustainability and fiscal rectitude. In the Budgets for 2002-03, several States have published ‘Budget at a Glance’ along the lines of the Union Budget as a first step. Some of the States also provide details on outstanding guarantees. In addition, a few States have started disseminating information on consolidated budgetary position, which are inclusive of off-budget borrowings.

(vi) Centre’s Initiativess

In pursuance of the recommendations of the Eleventh Finance Commission (EFC), an Incentive Fund for State fiscal reforms has been set up at the Centre. The disbursements from the Incentive Fund will be based on a single monitorable fiscal objective. Accordingly, each State would need to achieve a minimum improvement of 5 percentage points in the revenue deficit as a proportion of their revenue receipt each year till 2004-05. For States with a revenue surplus, 3 percentage points improvement in the balance in the current revenue (BCR) is required for release of funds under this facility. Accordingly, several State Governments have drawn up Medium-Term Fiscal Reforms Programme (MTFRP) and entered into MoUs with the Union Ministry of Finance. The MTFRP of States cover various areas such as fiscal consolidation, public sector enterprises reform, power sector reforms and fiscal transparency.

The Union Budget 2002-03 made provisions for reform-linked assistance of Rs.12,300 crore for States under various schemes such as Accelerated Power Development and Reform Programme (APDRP), Accelerated Irrigation Benefit Programme (AIBP), Urban Reforms Incentive Fund (URIF), and Rural Infrastructure Development Fund (RIDF). In addition, a lump-sum amount of Rs.2,500 crore has been proposed for implementing policy reforms in sectors constraining growth and development.

(vii) Reserve Bank’s Initiatives

In the recent past, the Reserve Bank has initiated a close and intensive interaction with State Governments on a regular basis, and on a wide range of issues. Accordingly, several significant initiatives have been taken during the reform period:

• In its role as a banker to States, the Reserve Bank had examined the implications of contingent liabilities/guarantees extended by States. The Technical Committee on State Government Guarantees, 1999 has recommended placing limits on Government guarantees;

• Since 1999, States have also been encouraged to access the market for a part of their market borrowings. Within the approved borrowing programme, State Governments are provided with the option of raising resources in a flexible manner in terms of method, timing and maturity. State Governments can borrow from the market between 5 per cent to 35 per cent of the approved borrowing limit under the new scheme. So far, 12 States have raised funds directly from the market. The gains from the auction mechanism were seen from the fact that the weighted average interest rates were below the pre-announced rates;

• The Reserve Bank has been advising the State Governments in areas such as cash management, funds management and reforms in budgetary practices;

• Mounting debt of the State Governments is increasing the interest burden on State finances. To achieve a sustainable level of debt, since 1999-2000, a Consolidated Sinking Fund has been set up in the Reserve Bank, which is optional for State Governments. Eleven States have so far started operating the Consolidated Sinking Fund to meet redemption of their market loans. Each State is required to contribute 1 to 3 per cent of its outstanding market loans each year to the Fund; and

• The Reserve Bank constituted a Group of State Finance Secretaries on State Government Guarantees in 2001 to analyse and classify different type of guarantees including letters of comfort issued by the States and to examine the fiscal risk under each type of guarantees.