Pattern of Public Expenditure and Expenditure Implications of Fiscal Reform Measures
4.4 Quality of expenditure of the State
4.4.2 Efficiency of Government Expenditure
Table 4.14
Results of the Regression Analysis of Impact of Aggregate Expenditure on Developmental Expenditure
Variable Coefficient t statistic
Aggregate Expenditure .5060469***
(.0611564) 8.27
Constant 21.61483
(107.0635)
0.20
R2 0.8009
LB statistic = 6.0167 F( 1,17) 68.49***
Figures in parentheses represent standard error of the estimated coefficients
***, ** and * indicate significant at 0.01, 0.05 and 0.10 level respectively
From table 4.13 and 4.14, the values of the F-statistic for overall significance are found to be highly significant. No auto-correlation has been found in the residuals of the regression models. Thus, on the whole, the results obtained from the regression analyses are credible.
The coefficients of both total and aggregate expenditure are found to be positive and significant at 1 percent level implying that increase in total and aggregate expenditure of the state has led to increase in development expenditure of the state. The coefficient of the regression of development expenditure on total expenditure is found to be .5899371 which implies that 1 percent increase in total expenditure has led to less than proportionate increase in development expenditure of the state. Similarly, 1 percent increase in aggregate expenditure has led to only .5060469 percent increase in development expenditure of the state.
enterprises have been considered as one of the unproductive expenditures of the states in India (Thorat and Roy, 2004). Guarantees are liabilities contingent on the consolidated fund of the state in case of default by the borrower from whom the guarantees have been extended.
But when the public sector fails to pay the guarantees, ultimately the state governments have to repay it. Most of the Public Sector Undertakings in Assam failed to repay the government guaranteed loans and it became liability of the respective governments. Many enterprises in Assam work under the psychology that if the state government provides a guarantee, it no longer is the responsibility of the enterprise to service the debt (Srivastava et al., 1999). To sort out this problem, the state government laid down the procedure for issues of guarantees and fixed a ceiling of ` 1,500 crore on guarantees to be given with effect from April 2000 (Government of Assam, 2003). After that, the Government of Assam revised the targets on guarantees under Assam Fiscal Responsibility and Budget Management Act (AFRBM). As per AFRBM Act, state government guarantees should be equal to or less than 50 percent of state’s own tax and non-tax revenues of the second preceding year (Government of Assam, 2010). The outstanding guarantees of the state government during the study period have been provided in table 4.15.
It is evident from table 4.15 that the outstanding guarantees of the state government increased from ` 1430 crore in 1998-99 to ` 1883 crore in 2003-04. The Government of Assam failed to meet the norms on guarantees (a ceiling of ` 1,500 crore) for consecutive years for the period from 2001-02 to 2003-04. This was a clear case of fiscal indiscipline. The compound annual growth rate of guarantees provided by the state government was 5.65 percent during this period. It implied that instead of reducing the amount of guarantees, state government provided more guarantees to the State Public Sector Enterprises. As most of the Public Sector Enterprises were not viable, the state government had to repay the guaranteed amount along with the interest. It ultimately created pressure on revenue expenditure of the state government. The state was able to meet the revised target on guarantees prescribed by AFRBM Act for consecutive years during 2004-05 to 2009-10. The outstanding amount of the guarantees of the state government was found to be below 50 percent of state’s own revenues of the second preceding year during the above mentioned time period.
Table 4.15
Outstanding Guarantees of the State during the Study Period (``` in crore) `
Year Outstanding
Guarantees
As a percentage of State’s Own Resources of the Second
Preceding year
1 2 3
1991-92 1028 186.91
1992-93 1094 156.73
1993-94 1230 158.71
1994-95 1384 141.51
1995-96 1250 129.94
1996-97 1150 119.92
1997-98 1430 137.76
1998-99 1430 131.31
1999-00 1477 116.94
2000-01 1583 110.31
2001-02 1853 110.96
2002-03 1881 96.96
2003-04 1883 89.71
2004-05 711 27.05
2005-06 1273 42.21
2006-07 904 23.90
2007-08 951 20.27
2008-09 796 14.90
2009-10 299 5.44
Source: Handbook of Statistics of State Government Finances, Reserve Bank of India, various issues
Report of the Comptroller and Auditor General of India, Government of Assam, various issues
To have a proper idea about efficiency of public expenditure, it is also necessary to observe the expenditure on interest payments, pension and salary and wages which are popularly known as committed expenditure. The higher proportion of committed expenditure to revenue expenditure reduces the expenditure on maintenance activities which in turn may deteriorate the existing infrastructure of a state (Jagannathan, 1986). The expenditure on these three items constitutes a major portion of the revenue expenditure of the state government. Due to the nature of downward rigidity of these components of expenditure, the government fails to reduce committed expenditure particularly during the time of fiscal imbalances. The factors which normally contribute towards enhancement of those
expenditure are revision of the pay scale of the government employees and increase in high cost public debt etc. As data on salary and wages of the state before the year 1999-00 is not available, the data considered for this analysis includes the time period 1999-00 to 2009-10.
The committed expenditure of the Government of Assam during the study period has been provided in 4.16.
Table 4.16
Amount of Committed Expenditure and its Share to Revenue Receipt and Expenditure of Assam (```` in crore)
Year Salaries
and Wages Pensions Interest Payment
Committed Expenditure
(CE)
CE as % of Revenue
Receipt
CE as % of Revenue Expenditure
1 2 3 4 5 6 7
1999-00 3452 (59.05)
518 (8.86)
971 (16.61)
4941
102.06 84.5
2000-01 3688 (57.47)
673 (10.49)
884 (13.78)
5245
93.04 81.73
2001-02 3814 (55.71)
731 (10.68)
1059 (15.47)
5604
93.95 81.86
2002-03 3883 (54.59)
776 (10.91)
1244 (17.49)
5903
86.89 82.99
2003-04 4462 (52.81)
909 (10.76)
1446 (17.11)
6817
87.79 80.68
2004-05 5194 (50.78)
1062 (10.38)
1404
(13.73) 7660 77.09 74.89
2005-06 4238 (40.22)
1011 (9.60)
1510
(14.33) 6759 56.11 64.15
2006-07 4684 (40.89)
1178 (10.28)
1516
(13.23) 7378 53.98 64.40
2007-08 5241 (41.13)
1341 (10.52)
1512
(11.86) 8094 52.66 63.51
2008-09 5840 (41.00)
1437 (10.09)
1593
(11.18) 8870 49.07 62.28
2009-10 8193 (38.58)
1769 (8.33)
1833
(8.63) 11795 59.31 55.55
Source: Report of the Comptroller and Auditor General of India, Government of Assam, various issues
Figures in parentheses represent percentage of these variables to revenue expenditure
It is evident from table 4.16 that during the period 1999-2004, committed expenditure, on an average, constituted more than 80 percent of revenue expenditure leaving little fund available for developmental activities. Similar to this, committed expenditure constituted, on an average, more than 92 percent of revenue receipt during the same period implying that revenue earned by the government was used mainly to pay salaries and wages, pension and interest payments. The percentage share of committed expenditure to revenue receipt was found to be the highest in the year 1999-00 when it constituted more than 100 percent (102.06%) of revenue receipt. It implies that even the entire revenue earned by the state was not sufficient to meet the committed expenditure and borrowed funds were used to meet that expenditure in that year. But significant improvement was noticed during the time period 2005-06 to 2008-09 as government was able to reduce the ratio in the above mentioned years.
In the year 2008-09, committed expenditure constituted 49.07 percent of the revenue receipt and 62.28 percent of the revenue expenditure of the state. This reflects better efficiency of government expenditure as more funds are available for the state after meeting the committed expenditure. As improvement in quality of expenditure has been observed in recent years, it is necessary to analyse the reasons for such improvement in expenditure quality of the state.
Actually, the state has undertaken different reform measures in recent years particularly aimed at reduction of government expenditure. Under these circumstances, it is necessary to analyse the role of those reform measures in controlling expenditure of the state government.