Fiscal and Debt Sustainability of the State
5.2 Fiscal Sustainability of the State
5.2.4 Trend and Composition of Primary Deficit and Primary Revenue Deficit
It is evident from table 5.3 that net loans available from the centre were the main sources of financing gross fiscal deficit of the state during 1990s. The share of the net loans provided by the central government has declined during the period of study which is found to be replaced by market borrowings. The decline in the share of central government’s loans was mainly due to declaration of the state as a special category state which helped it to acquire more plan assistance in the form of grants which were earlier provided as loans (Srivastava et al., 1999).
The automatic entitlement of states to loans against small savings is also found to be responsible for the declining share of central loans (Rajaraman et al., 2005). With the change in the accounting system with effect from 1999-2000, states’ share in small savings which was earlier included under loans from the Centre was included under internal debt and shown as special securities issued to National Small Savings Fund (NSSF) of the Central Government (RBI, 2011). As discussed above, the recommendation of the Twelfth Finance Commission to prevent the Planning Commission from providing loans to the state government also contributed towards reduction of central loans (Government of Assam, 2010). As a result of those changes, market borrowings have emerged as a significant source of financing fiscal deficit of the state in recent times. During the first decade of the present century, market borrowing was found to be the major source of financing the gross fiscal deficit. Another significant source of borrowing for the government in recent years is the small savings and provident funds of the state government. It can be inferred from the above table that the existence of fiscal surplus has helped the states to repay the loans which in turn lead to decline in the debt-GSDP ratio of the state. This happened in the year 2006-07, 2007- 08 and 2008-09. But the huge fiscal deficit in the year 2009-10 has again raised the question of fiscal and debt sustainability of the state. As in any study of fiscal sustainability, primary deficit is always the key policy variable, it is necessary to study the trend and composition of primary deficit in the state which is carried out in the next sub-section.
revenue deficit which is calculated by deducting interest payments from revenue deficit measures the extent to which the additional debt build-up in the current year, independent of interest on inherited debt, is going towards current expenditures rather than towards build up of assets through the capital account. Primary revenue deficit is considered as the first sustainability indicator as it constitutes the floor of the overall primary deficit. The time series data on trend and composition of primary deficit and primary revenue deficit of the state are shown in table 5.4.
Table 5.4
Trend and Composition of Primary Deficit and Primary Revenue Deficit of the State (```` in crore)
Year Non Debt Receipt
Primary Revenue Expenditure
Loans &
Advances
Capital Outlay
Primary Expenditure
Primary Revenue
Deficit Primary Deficit
1 2 3 4 5 6
(3+4+5) 7 8
(6-2)
1990-91 1783 1657 183 247 2087 -120 304 (2.86)
1991-92 2424 2055 245 285 2585 -363 161 (1.35)
1992-93 2619 2040 140 237 2417 -573 -202 (-1.54)
1993-94 3324 2411 153 251 2815 -907 -509 (3.36)
1994-95 2968 2682 131 277 3090 -279 122 (.78)
1995-96 3384 3088 160 301 3549 -288 165 (1.03)
1996-97 3864 3011 124 242 3377 -845 -487 (2.95)
1997-98 4335 3400 109 329 3838 -926 -497 (2.98)
1998-99 4518 3895 76 364 4335 -612 -183 (1.10)
1999-00 4855 4890 133 483 5506 49 651 (1.86)
2000-01 5656 5552 217 562 6331 -86 675 (1.83)
2001-02 5994 5784 82 513 6379 -181 385 (1)
2002-03 6821 5868 131 506 6505 -925 -316 (.72)
2003-04 7805 7004 128 622 7754 -761 -51 (.10)
2004-05 11326 8825 974 2181 11980 -1112 654 (1.24)
2005-06 12083 9026 106 1085 10217 -3019 -1866 (3.22)
2006-07 13702 9941 81 1453 11475 -3726 -2227 (3.45)
2007-08 15365 11232 143 1688 13063 -4093 -2302 (3.21)
2008-09 18112 12650 89 2373 15112 -5427 -3000 (3.24)
2009-10 19917 19399 99 2629 22127 -485 2210 (3.16)
Figures in parentheses represent percentage of these variables to GSDP at current prices.
(-) implies surplus
Source: Report of the Comptroller and Auditor General of India, Government of Assam, Various issues
From table 5.4, it is found that the state experienced moderate primary deficit or surplus in 1990s except in the year 1990-91 and 1999-00 when primary deficit of the state became ` 304 and ` 651 crore constituting 2.86 and 1.86 percent of GSDP respectively. The state also incurred a primary revenue deficit of ` 49 crore in the year 1999-00 implying that the debt taken during that year was going towards current expenditure. The moderate primary deficit or surplus of the state during the time period 1991-92 to 1998-99 was due to the fact the non- debt receipt was higher or moderately lower than the primary expenditure of the state for the above mentioned period. In the initial years of the first decade of the present century, the state was found to incur primary deficit in the year 2000-01 and 2004-05 which contributed towards fiscal instability of the state. Again, in the year 2009-10, the state has incurred huge primary deficit amounting to ` 2265 crore implying the huge gap in resources for meeting the current obligations. The time series data on Primary deficit as a percent of GSDP is also shown in figure 5.3.
Figure 5.3 Primary Deficit as a Percentage of GSDP of the State
It can be inferred from figure 5.3 that the state was able to earn primary surplus for consecutive years during the time period 2005-06 to 2008-09. But the state has again incurred primary deficit in the year 2009-10 amounting to 3.16 percent of GSDP. This sudden rise in primary deficit raises concern about the state government’s ability of sustaining such huge primary deficit. Unless growth rate of GSDP is sufficient to meet the interest on public debt, this will likely to reduce the repayment capacity of the state. Under these circumstances, it is necessary to carry out a detailed analysis of debt sustainability of
the state to find out whether difference between growth rate of GSDP and interest rate on public debt is adequate to cancel out the effects of primary deficit.