Chhattisgarh: Public Finance and fiscal Policy | Chhattisgarh State PSC (CGPSC) Preparation: All subjects - CGPSC (Chhattisgarh) PDF Download

State of the Economy

• According to the 14th Planning Commission, Chhattisgarh achieved a growth rate comparable to the national level during the last two plan periods. In the first two years of the Twelfth Plan, its growth rate exceeded the national average. The primary sector supports nearly 80 percent of the population and contributes about 30 percent to the Gross State Domestic Product (GSDP). However, with 70 percent of the area dependent on rain-fed agriculture, uncertain monsoon conditions impact the income of the rural population.
• In recent years, the secondary sector's contribution to the GSDP has declined in percentage terms, despite the state's rich mineral resources. This decline is mainly due to the ongoing slowdown in the manufacturing sector. The tertiary sector has increased its share in the GSDP, but growth is limited by the low per capita income.
• Chhattisgarh continues to have a relatively low per capita income, which is less than half that of major states like Gujarat, Maharashtra, Haryana, Kerala, and Tamil Nadu. Even more concerning, the disparity in per capita income between states has widened over the last ten years. Poverty estimates released by the Planning Commission in July 2013 show that Chhattisgarh has the highest percentage of people living below the poverty line (39.93 percent).

Fiscal Situation

• Chhattisgarh enacted the Financial Responsibility and Budget Management Act (FRBM) in 2005, following the Central Government's passage of the Act in 2003. The objectives of this legislation include promoting fiscal transparency, conducting fiscal policy within a medium-term framework, and ensuring long-term macroeconomic stability. 
• Specifically, the Act aimed to reduce the revenue deficit of the Central Government to zero by March 2008 and bring the fiscal deficit down to less than 3 percent of GDP. However, these targets have not been met, and both revenue and fiscal deficits at the Centre have continued to rise, surpassing the 3 percent ceiling.
• While Chhattisgarh has adhered to the targets set by its FRBM Act, the fiscal performance of states is largely influenced by the performance of the Central Government. Consequently, the Centre's macroeconomic management impacts the budgetary resources and expenditures of the states. Therefore, a mechanism needs to be established to ensure that the Central Government follows the same discipline it imposes on the states. 
• The 14th Finance Commission suggested that the 3 percent ceiling for fiscal deficit under the FRBM Act should be relaxed for states like Chhattisgarh, considering their current level of debt sustainability and the significant investment needs of the state. The state should be allowed the flexibility to pursue sustainable borrowings based on its development requirements. If this suggestion is not accepted, the borrowing ceiling could be increased to 5 percent of GSDP.
• Chhattisgarh has demonstrated strong fiscal management performance. The state has been rated among the best-performing states in fiscal management in the RBI's Study of State Finances. It has consistently maintained a high tax-to-GSDP ratio of 8 percent, placing it among the top four states, achieved a healthy tax buoyancy of 1.6, and maintained a continuous revenue surplus. Its debt-to-GSDP and interest payment-to-GSDP ratios remain the lowest among non-special category states.
• However, the situation has been exacerbated by shortfalls in fiscal transfers from the Centre due to declining revenue receipts and the increased cost of borrowing for states caused by the Centre's excessive market borrowing to finance its deficits. This has negatively impacted the resources available for Chhattisgarh to finance its developmental needs, putting severe stress on the state's finances and making it challenging to adhere to FRBM targets. As a result, the state ended FY 2013-14 with a revenue deficit of Rs. 726 crore, after ten consecutive years of revenue surplus, primarily due to a Rs. 713 crore shortfall in its share of central taxes.
• Moreover, the Central Government's recent decision to establish the Seventh Central Pay Commission will also impact the finances of states during the Commission's award period, an issue that has not been accounted for by any state. This consideration should be factored into the determination of states' shares in the divisible pool.
• Therefore, there is a strong case for providing adequate financial support to the state to achieve greater equalization in delivering a standard level of public services and to accelerate its growth momentum.

Deficits, Debts and FRBM Targets for 2017-18

The Fiscal Responsibility and Budget Management (FRBM) Act, 2005 of Chhattisgarh sets annual targets to progressively reduce the state government's outstanding liabilities, revenue deficit, and fiscal deficit.

• Revenue Deficit: A revenue deficit occurs when revenue expenditure exceeds revenue receipts, indicating that the government needs to borrow to finance its expenses, which do not create capital assets. However, for 2017-18, the budget estimates a revenue surplus of Rs 4,781 crore (or 1.73% of GSDP), implying that revenue receipts are expected to exceed revenue expenditure, resulting in a surplus. This estimate shows that the state is meeting the target of eliminating the revenue deficit, as recommended by the 14th Finance Commission.
• Fiscal Deficit: Fiscal deficit refers to the excess of total expenditure over total receipts. This gap is covered by government borrowings, leading to an increase in the state's total liabilities. A high fiscal deficit may imply a greater repayment obligation in the future. The fiscal deficit for 2017-18 is estimated at Rs 9,647 crore, or 3.49% of GSDP. In 2016-17, the fiscal deficit was estimated at Rs 7,688 crore, which is 2.92% of GSDP, slightly higher than the budget estimate of 2.88%.
• Outstanding Liabilities: Outstanding liabilities represent the accumulation of borrowings over the years. For 2017-18, these liabilities are expected to be 18.47% of GSDP.

Receipts in 2017-18

The total revenue receipts for 2017-18 are estimated at Rs 66,094 crore, reflecting a 5.3% increase over the revised estimates for 2016-17.

• State’s Tax Revenue: The state’s tax revenue is expected to rise by 3% (Rs 687 crore) in 2017-18 compared to the revised estimates for 2016-17. The tax-to-GSDP ratio is targeted at 8.5% in 2017-18, slightly lower than the revised estimate of 8.7% for 2016-17. This suggests that tax collection growth is anticipated to be lower than the projected economic growth.
• Non-Tax Revenue: Non-tax revenue for 2017-18 is estimated to increase by 2.4% (Rs 184 crore) over the revised estimates for 2016-17. Chhattisgarh’s interest earnings are expected to decrease by 43% from the revised estimates for 2016-17, falling to Rs 143 crore.
• Grants from the Centre: Grants from the central government are expected to rise by 2.8%, from Rs 13,722 crore in 2016-17 (RE) to Rs 14,101 crore in 2017-18. The state’s share in central taxes, another component of transfers from the Centre, is projected to increase by 10.9%, reaching Rs 20,868 crore in 2017-18.
• Tax Revenue Details: Sales tax is expected to be the largest component (57%) of the tax revenue, with an estimated collection of Rs 13,445 crore. Sales tax collections are anticipated to increase by 8% over the revised estimates for 2016-17. Note that the Goods and Services Tax (GST) is expected to be introduced in 2017-18, which will subsume taxes such as sales tax and entertainment tax (unless levied by local bodies). The impact of GST on tax collections will become clear in due course. Additionally, Rs 3,169 crore is expected to be generated from excise duty, and Rs 1,767 crore from taxes on the entry of goods and passengers.
• Non-Tax Revenue Details: Chhattisgarh is estimated to generate Rs 7,704 crore through non-tax sources in 2017-18, including Rs 5,600 crore from mining and metallurgical industries.