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Early this week, the Comptroller and Auditor General (CAG) of India tabled a report on the finances of Uttar Pradesh for the financial year 2020-21. A few days prior to that, on May 26, the budget for Uttar Pradesh for 2022-23 was presented, along with which the final audited expenditure and receipt figures for the year 2020-21 were released. The year 2020-21 presented a two-fold challenge for states – loss in revenue due to impact of COVID-19 pandemic and lockdown, and the need for increased expenditure to support affected persons and economic recovery. CAG noted that Uttar Pradesh’s GSDP grew by 1.05% in 2020-21 as compared to a growth of 6.5% in 2019-20. The state reported a revenue deficit of Rs 2,367 crore in 2020-21 after reporting revenue surplus for 14 successive years since 2006-07. Revenue deficit is the excess of revenue expenditure over revenue receipts. This blog looks at the key trends in the finances of Uttar Pradesh in 2020-21 and certain observations by CAG on fiscal management by the state.
Spending and Deficits in 2020-21
Underspending: In 2020-21, total spending by the state was 26% less than the budget estimate presented in February 2020. In sectors such as water supply and sanitation, the actual expenditure was 60% less than the amount budgeted, while in agriculture and allied activities only 53% of the budgeted amount was spent. CAG observed that in 251 schemes across 57 departments, the state government did not incur any expenditure in 2020-21. These schemes had a budget provision of at least one crore rupees, and had cumulative allocation of Rs 50,617 crore. These included schemes such as Pipe Drinking Water Scheme in Bundelkhand/Vindhya and apportionment of pension liabilities. Moreover, the overall savings due to non-utilisation of funds in 2020-21 was 27.28% of total budget provisions. CAG observed that the budgetary provisions increased between 2016 and 2021. However, the utilisation of budget provisions reduced between 2018-19 and 2020-21.
Pattern of spending: CAG observed that in case of 12 departments, more than 50% of the expenditure was incurred in March 2021, the last month of the financial year. In the civil aviation department, 89% of the total expenditure was incurred in March while this figure was 62% for the social welfare department (welfare of handicapped and backward classes). CAG noted that maintaining a steady pace of expenditure is a sound practice under public financial management. However, the Uttar Pradesh Budget Manual has no specific instructions for preventing such bunching of expenditure. The CAG recommended that the state government can consider issuing guidelines to control the rush of expenditure towards the closing months of the financial year.
Management of deficit and debt: As a measure to mitigate the impact of COVID-19, an Ordinance was promulgated in June 2020 to raise the fiscal deficit limit from 3% of GSDP to 5% of GSDP for the year 2020-21. Fiscal deficit represents the gap between expenditure and receipts in a year, and this gap is filled with borrowings. The Uttar Pradesh Fiscal Responsibility and Budget Management Act, 2004 (FRBM Act) passed by Uttar Pradesh Assembly specifies the upper limit for debt and deficits. The Ordinance thus permitted the state government to borrow more to sustain its budget expenditure. The fiscal deficit of the state in 2020-21 was 3.20% of GSDP, well below the revised limit. At the same time, the state’s outstanding debt to GSDP in 2020-21 was 32.77% of GSDP, above the target of 32% of GSDP set under the FRBM Act. Outstanding debt represents accumulation of debt over the years.
Table 1: Spending by Uttar Pradesh in 2020-21 as compared to Budget Estimates (in Rs crore)
|
Particular |
2020-21 BE |
2020-21 Actuals |
% change from BE to Actuals |
|
Net Receipts (1+2) |
4,24,767 |
2,97,311 |
-30% |
|
1. Revenue Receipts (a+b+c+d) |
4,22,567 |
2,96,176 |
-30% |
|
a. Own Tax Revenue |
1,58,413 |
1,19,897 |
-24% |
|
b. Own Non-Tax Revenue |
31,179 |
11,846 |
-62% |
|
c. Share in central taxes |
1,52,863 |
1,06,687 |
-30% |
|
d. Grants-in-aid from the Centre |
80,112 |
57,746 |
-28% |
|
Of which GST compensation grants |
7,608 |
9,381 |
23% |
|
2. Non-Debt Capital Receipts |
2,200 |
1,135 |
-48% |
|
3. Borrowings |
75,791 |
86,859 |
15% |
|
Of which GST compensation loan |
- |
6,007 |
- |
|
Net Expenditure (4+5+6) |
4,77,963 |
3,51,933 |
-26% |
|
4. Revenue Expenditure |
3,95,117 |
2,98,543 |
-24% |
|
5. Capital Outlay |
81,209 |
52,237 |
-36% |
|
6. Loans and Advances |
1,637 |
1,153 |
-30% |
|
7. Debt Repayment |
34,897 |
26,777 |
-23% |
|
Revenue Balance |
27,451 |
-2,367 |
-109% |
|
Revenue Balance (as % of GSDP) |
1.53% |
-0.14% |
|
|
Fiscal Deficit |
53,195 |
54,622 |
3% |
|
Fiscal Deficit (as % of GSDP) |
2.97% |
3.20% |
Note: A negative revenue balance indicates a deficit. The actual fiscal deficit reported by Uttar Pradesh for 2020-21 in 2022-23 budget was 2.8% of GSDP. This difference was due to higher GSDP figure reported by the state.
Sources: Uttar Pradesh Budget Documents of various years; CAG; PRS.
Finances of State Public Sector Undertakings
Public sector undertakings (PSUs) are set up by the government to discharge commercial activities in various sectors. As on March 31, 2021, there were 115 PSUs in Uttar Pradesh. CAG analysed the performance of 38 PSUs. Out of these 38 PSUs, 22 companies earned a profit of Rs 700 crore, while 16 companies posted a loss of Rs 7,411 crore in 2020-21. Note that both the number of PSUs incurring losses and the quantum of losses has decreased since 2018-19. In 2018-19, 20 PSUs had reported losses worth Rs 15,219 crore.
Figure 1: Cumulative losses incurred by Uttar Pradesh PSUs (Rs crore)
Sources: CAG; PRS.
Losses of power sector PSUs: Three power sector PSUs—Uttar Pradesh Power Corporation Limited, Purvanchal Vidyut Vitran Nigam Limited, and Paschimanchal Vidyut Vitran Nigam Limited—were the top loss incurring PSUs. These three PSUs accounted for 73% of the total losses of Rs 7,411 crore mentioned above. Note that as of June 2022, for each unit of power supplied, the revenue realised by UP power distribution companies (discoms) is 27 paise less than cost of supply. This is better than the gap of 34 paise per unit at the national level. However, the aggregate technical and commercial losses (AT&C) of the Uttar Pradesh discoms was 27.85%, considerably higher than the national average of 17.19%. AT&C losses refer to the proportion of power supplied by a discom for which it does not receive any payment.
Off-budget borrowings: CAG also observed that the Uttar Pradesh government resorted to off-budget borrowing through state owned PSUs/authorities. Off budget borrowings are not accounted in the debt of the state government and are on books of the respective PSUs/authorities, although, debt is serviced by the state government. As a result, the outstanding debt reported in the budget does not represent the actual debt position of the state. CAG identified off-budget borrowing worth Rs 1,637 crore. The CAG recommended that the state government should avoid extra-budget borrowings. It should also credit all the loans taken by PSUs/authorities on behalf of and serviced by the state government to state government accounts.
Management of Reserve Funds
The Reserve Bank of India manages two reserve funds on the behalf of state governments. These funds are created to meet the liabilities of state governments. These funds are: (i) Consolidated Sinking Fund (CSF), and (ii) Guarantee Redemption Fund (GRF). They are funded by the contributions made by the state governments. CSF is an amortisation fund which is utilised to meet the repayment obligations of the government. Amortisation refers to payment of debt through regular instalments. The interest accumulated in the fund is used for repayment of outstanding liabilities (which is the accumulation of total borrowings at the end of a financial year, including any liabilities on the public account).
In line with the recommendation of the 12th Finance Commission, Uttar Pradesh created its CSF in March 2020. The state government may transfer at least 0.5% of its outstanding liabilities at the end of the previous year to the CSF. CAG observed that in 2020-21, Uttar Pradesh appropriated only Rs 1,000 crore to the CSF against the requirement of Rs 2,454 crore. CAG recommended that the state government should ensure at least 0.5% of the outstanding liabilities are contributed towards the CSF every year.
GRF is constituted by states to meet obligations related to guarantees. The state government may extend guarantee on loans taken by its PSUs. Guarantees are contingent liabilities of the state government, as in case of default by the company, repayment burden will fall on the state government. GRF can be used to settle guarantees extended by the government with respect to borrowings of state PSUs and other bodies. The 12th Finance Commission had recommended that states should constitute GRF. It was to be funded through guarantees fees to meet any sudden discharge of obligated guarantees extended by the states. CAG noted that Uttar Pradesh government has not constituted GRF. Moreover, the state has also not fixed any limits for extending guarantees.
For an analysis of Uttar Pradesh’s 2022-23 budget, please see here.
Each year during the Budget Session, Rajya Sabha examines the working of certain ministries. This year it has identified four ministries for discussion, which includes the Ministry of Home Affairs. In light of this, we analyse some key functions of the Ministry and the challenges in carrying out these functions.
What are the key functions of Ministry of Home Affairs?
The Ministry of Home Affairs (MHA) is primarily responsible for: (i) maintenance of internal security, (ii) governance issues between the centre and states, and (iii) disaster management. It also discharges several other key functions that include: (i) border management, (ii) administration of union territories, (iii) implementation of provisions relating to the official languages, and (iv) conducting the population census every ten years.
Under the Constitution, ‘public order’ and ‘police’ are state list subjects. The MHA assists the state governments by providing them: (i) central armed police forces, and (ii) financial assistance for modernising state police forces, communication equipment, weaponry, mobility, training and other police infrastructure.
What is the role of the central armed police forces?
The MHA manages seven central police forces: (i) Central Reserve Police Force (CRPF) which assists in internal security and law and order, (ii) Central Industrial Security Force (CISF) which protects vital installations (like airports) and public sector undertakings, (iii) National Security Guards which is a special counter-terrorism force, and (iv) four border guarding forces, namely, Border Security Force (BSF), Indo-Tibetan Border Police (ITBP), Sashastra Seema Bal (SSB) and Assam Rifles (AR).
As of January 2017, the total sanctioned strength of the seven CAPFs was 10. 8 lakhs. However, 15% of these posts (i.e., about 1.6 lakhs posts) were lying vacant. The vacancy in the CAPFs has remained above 7% for the last five years (see Table 1). In 2017, the Sashastra Seema Bal had the highest vacancy (57%). The CRPF, which accounts for 30% of the total sanctioned strength of the seven CAPFs, had a vacancy of 8%.
How does MHA assist the police forces?
In Union Budget 2018-19, Rs 1,07,573 crore has been allocated to the Ministry of Home Affairs. The Ministry has estimated to spend 82% of this amount on police. The remaining allocation is towards grants to Union Territories, and other items including disaster management, rehabilitation of refugees and migrants, and the Union Cabinet.
The MHA has been implementing Modernisation of Police Forces (MPF) scheme since 1969 to supplement the resources of states for modernising their police forces. Funds from the MPF scheme are utilised for improving police infrastructure through construction of police stations, and provision of modern weaponry, surveillance, and communication equipment. Some other important objectives under the scheme include upgradation of training infrastructure, police housing, and computerisation.
The scheme has undergone revision over the years. A total allocation of Rs 11,946 crore was approved for the MPF scheme, for a five-year period between 2012-13 to 2016-17. Following the recommendations of the 14th Finance Commission (to increase the share of central taxes to states), it was decided that the MPF scheme would be delinked from central government funding from 2015-16 onwards. However, in September 2017, the Union Cabinet approved an outlay of Rs 25,060 crore under the scheme, for the period 2017-18 to 2019-20. The central government will provide about 75% of this amount, and the states will provide the remaining 25%.
The Comptroller and Auditor General (CAG) has found that weaponry in several state police forces is outdated, and there is a shortage of arms and ammunitions. An audit of Rajasthan police force(2009-14) found that there was a shortage of 75% in the availability of modern weapons against the state’s requirements. In case of West Bengal and Gujarat police forces, CAG found a shortage of 71% and 36% respectively. Further, there has been a persistent problem of underutilisation of modernisation funds by the states. Figure 1 shows the level of utilisation of modernisation funds by states between 2010-11 and 2016-17.
What are the major internal security challenges in India?
Maintaining internal security of the country is one of the key functions of the MHA. The major internal security challenges that India faces are: (i) terrorist activities in the country, (ii) cross-border terrorism in Jammu and Kashmir, (iii) Left Wing Extremism in certain areas, and (iv) insurgency in the North-Eastern states.
Between 2015 and 2016, the number of cross-border infiltrations in Jammu and Kashmir increased by almost three times, from 121 to 364. On the other hand, incidents of insurgency in Left Wing Extremism areas have decreased from 1,048 in 2016 to 908 in 2017.
The Standing Committee on Home Affairs noted in 2017-18 that security forces in Jammu and Kashmir are occupied with law and order incidents, such as stone pelting, which gives militants the time to reorganise and perpetrate terror attacks. The Committee recommended that the MHA should adopt a multi-pronged strategy that prevents youth from joining militancy, curbs their financing, and simultaneously launch counter-insurgency operations.
In relation to Left Wing Extremism, the Standing Committee (2017) observed that police and paramilitary personnel were getting killed because of mine blasts and ambushes. It recommended that the MHA should make efforts to procure mine-resistant vehicles. This could be done through import or domestic manufacturing under the ‘Make in India’ programme.
What is the MHA’s role in border management?
India has a land border of over 15,000 kms, which it shares with seven countries (Pakistan, China, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan). Further, it has a coastline of over 7,500 kms. The MHA is responsible for: (i) management of international lands and coastal borders, (ii) strengthening of border guarding, and (iii) creation of infrastructure such as roads, fencing, and lighting of borders.
Construction of border outposts is one of the components of infrastructure at border areas. The Standing Committee on Home Affairs (2017) noted that the proposal to construct 509 outposts along the India-Bangladesh, and India-Pakistan borders had been reduced to 422 outposts in 2016. It recommended that such a reduction should be reconsidered since 509 outposts would reduce the inter-border outpost distance to 3.5 kms, which is important for the security of the country.
How is coastal security carried out?
Coastal security is jointly carried out by the Indian Navy, Indian Coast Guard, and marine police of coastal states and Union Territories. The MHA is implementing the Coastal Security Scheme to strengthen the marine police of nine coastal states and four Union Territories by enhancing surveillance, and improve patrolling in coastal areas. Under this scheme, the Ministry sought to construct coastal police stations, purchase boats, and acquire vehicles for patrolling on land, among other objectives.
The Standing Committee on Home Affairs (2017) observed that the implementation of Phase-II of this scheme within the set time-frame has not been possible. It also noted that there was lack of coordination between the Indian Navy, the Indian Coast Guard, and the coastal police. In this context, the Committee recommended that the Director General, Indian Coast Guard, should be the nodal authority for coordinating operations related to coastal security.
