Out of the woods

THIS is the second year of the four-year fiscal correction path adopted by the Maharashtra State Legislature with the enactment of the Maharashtra Fiscal Responsibility and Budgetary Management Act, 2005 (MFRBM Act). Finance Minister Jayant Patil is confident that the State will eliminate revenue deficit and reduce fiscal deficit to the targeted level of less than 3 per cent by 2007-08 itself.

While the State was required to reduce revenue deficit by 1.5 per cent of the gross State domestic product (GSDP) in the first two years, it would be able to bring it down by more than 2 per cent. The State was required to reduce fiscal deficit by 0.3 per cent of the GSDP at the end of each financial year. The fiscal deficit was 4.92 per cent in 2004-05 and should have come down by 0.6 per cent by the end of 2006-07. The actual reduction is expected to be 1.78 per cent nearly three times the targeted reduction.

The MFRBM mandates that the government eliminate revenue deficit by 2008-09 and bring down fiscal deficit to less than 3 per cent of GSDP by 2008-09. As per the recommendations of the Twelfth Finance Commission, an incentive fund has been created to assist States that achieve the targets under the fiscal reforms programme. A sum of Rs.1,953.22 crore has been earmarked for Maharashtra, which it can avail of over the period until 2009-10, on the condition that it must achieve the fiscal objectives identified under the Medium Term Fiscal Reforms Programme every year. Maharashtra has become eligible to receive Rs.390.64 crore for the current year.

The State government has also come out of the situation where it had to rely on daily cash inflows and short-term loans, such as ways and means advance or overdraft facilities from the Reserve Bank of India, to pay salaries and make payments to agencies implementing government schemes.

Jayant Patil said: We have reached a situation where the State government did not have to resort to overdrafts during 2006-07 and we are confident of maintaining this position.

The reduction in deficit indicators in 2006-07 has been largely on account of growth in the economy, leading to a healthy increase in revenue receipts, and containing new debt stock. The measures undertaken required rationalising the revenue expenditure. The State has not been successful on this front.

In order to stay on course and achieve the MFRBM targets, the State would have to increase the expenditure on infrastructure sectors. Increased funding for social sectors such as education, health, water supply and welfare of the weaker sections is required to improve the Human Development Index.

With this in view, the State government has projected a healthy growth in tax revenues in the next three years. This is proposed to be achieved through a commitment to improve efficiency of tax collections, and at the same time to have moderate but reasonable tax rates. The fiscal deficit is proposed to be contained so that the debt servicing liability, which even after the decline in the current year, is still high at 30.41 per cent of the revenue receipts, can be brought down to more reasonable levels, Patil said while presenting the last State budget.

The States plan size is proposed to be stepped up by containing the growth in revenue expenditure. With a view to unlocking resources for developmental works, the revenue expenditure for 2007-08 is proposed to grow at a reduced rate of 6.82 per cent over that in 2006-07. As a result, it has become possible to increase the plan expenditure further to Rs.20,200 crore, which is 25.25 per cent of the total proposed expenditure during 2007-08. The States tax revenue in 2007-08 is estimated at Rs.45,874.06 crore. This will represent a growth of 13.77 per cent over 2006-07.