Mohd Ali Siddiqi
An online International Summer School Program on “Data, Monitoring and Evaluation” is a two-month immersive online hands-on certificate training course organised by IMPRI Impact and Policy Research Institute, New Delhi. The day 5 of the program on July 1st, started with a session on “Analysis of State Budget and Public Finance Data,” Dr Radhika Pandey, Senior Fellow, National Institute of Public Finance and Policy (NIPFP), New Delhi. Dr. Pandey proved to be an excellent guide for participants seeking insights into state budget analysis.
The session was structured to cover three main areas of focus: understanding the budget process, assessing states’ fiscal health, and evaluating debt sustainability.
Understanding the Budget Process
Dr. Pandey commenced by explaining the basics of government accounts, which comprise three primary funds – the Contingency Fund, Consolidated Fund, and Public Account. The Consolidated Fund plays a pivotal role as it serves to finance public expenditure through receipts from taxation and non-tax revenue, further divided into revenue and capital accounts.
Dr. Pandey then drew a crucial distinction between the Central Government and state budgets. Unlike the former, state budgets include both their own tax revenue and a share of central government tax revenue. The share is determined based on recommendations from the Finance Commission, with the current 15th Finance Commission recommending 41% of tax revenue to be devolved from the central government to state governments. Additionally, certain states receive grants from the central government, further supporting debt sustainability and financial stability.
The webinar delved into the components of expenditure, primarily capital and revenue expenditure. While revenue expenditure covers payments for interest, salaries, and pensions, it does not contribute to infrastructure development or asset creation. On the other hand, capital expenditure is directed towards development projects and creating assets. Dr. Pandey emphasized that the Central Government is focusing on bolstering capital expenditure to promote overall growth.
Assessing States’ Fiscal Health
The session further explored public accounts and their components, such as public account receipts and payments, giving participants a comprehensive understanding of budget composition. To exemplify practical budget analysis, Dr. Pandey used data from Uttar Pradesh and West Bengal for the year 2020-2021. Participants were guided on how to interpret budget data and identify key indicators, comparing actual, presented, and revised budgets. Dr. Pandey highlighted significant revenue receipts, including states’ own tax revenue and Finance Commission recommended shares.
Additionally, grants in aid and grants for centrally sponsored schemes were discussed as important sources of revenue for states. Capital receipts were categorized into debt receipts, market loans, and non-debt receipts, adding depth to the participants’ understanding of the financial aspects.
During the session, participants were educated about the components of revenue and capital expenditure, including general services like organs of state, interest payments, administrative services, and pensions. Social services such as education, health, and water supply were also covered, along with compensation to local bodies.
The webinar also focused on indicators for assessing a state’s fiscal health, including states’ own tax revenue as a percentage of total revenue receipts and states’ capital expenditure as a share of Gross State Domestic Product (GSDP) or total expenditure. Fiscal deficit, which is calculated as total expenditure minus revenue receipts and non-debt creating receipts, was discussed as a critical metric to determine revenue surplus or deficit.
Dr. Pandey explained that if revenue expenditure exceeds revenue receipts, a state faces a revenue deficit, which should ideally be on a declining trajectory to reduce the state’s debt burden. She emphasized that borrowing should ideally be reserved for capital expenditure rather than meeting day-to-day recurring transactions.
Using relevant examples, Dr. Pandey presented the fiscal health of various states, allowing participants to make informed comparisons across different metrics.
Evaluating Debt Sustainability
The session concluded with a detailed discussion on how to assess the sustainability of state debt. Key factors considered were ensuring that the rate of debt growth is lower than the rate of nominal GDP growth, revenue receipts as a percentage of GDP increasing over time, and the real rate of interest being lower than real output growth. A primary balance to GDP ratio greater than zero and a declining ratio of interest payments over time were also emphasized.
In conclusion, the Impact and Policy Research Institute’s webinar on “Analysis of State Budget and Public Finance Data” with Dr. Radhika Pandey provided a comprehensive understanding of government accounts, state budget analysis, fiscal indicators, and debt sustainability.
Participants gained valuable insights to make informed assessments of state finances and understand the complexities involved in ensuring fiscal health and debt management. The webinar successfully equipped attendees with the knowledge needed to navigate state budget data effectively and promote informed policy decisions.
Acknowledgement: Mohd Ali Siddiqi is a research intern at IMPRI.
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