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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.
The last few days have seen repeated disruptions in Parliament. In an Opinion Editorial published in the Indian Express, Chakshu Roy of PRS Legislative Research discusses the impact of the current disruptions on Parliament. His analysis points to how disruptions are an opportunity lost to hold the government accountable and to deliberate on significant legislative and policy issues. The second half of the budget session commenced last week with hardly any business transacted due to disruptions on different issues. This is not new. The 15th Lok Sabha has seen entire parliamentary sessions lost without any work being done. As it nears the end of its term, Parliament's productive time stands at 70 per cent, which is significantly lower than that of previous Lok Sabhas. As disruptions in Parliament have become routine, public reaction to such disruptions has also become predictable. Figures depicting the quantum of taxpayers' money lost every hour that Parliament does not function start doing the rounds, and the cry for docking the salary of disrupting members of Parliament becomes louder. What does not get adequate attention is the opportunity lost for holding the government accountable and deliberating on important legislative and policy issues. MPs are required to keep the government in check and oversee its functioning. One of the ways in which they do so is by asking ministers questions about the work done by their ministries. Ministers respond to such questions during the first hour of Parliament, which is known as question hour. During this hour, 20 questions are slotted for oral responses by ministers. Based on the response, MPs can cross-question and corner the minister by asking supplementary questions. On certain occasions, they are also able to extract assurances from the minister to take action on certain issues. When question hour is disrupted, not only are these opportunities lost, it also leads to ineffective scrutiny of the work done by the various ministries of the government. Last week, some of the questions that could not be orally answered related to four-laning of highways, performance of public sector steel companies, supply of food grains for welfare schemes, and generic versions of cancer drugs. In 2012, out of the 146 hours allocated for question hour in both Houses of Parliament, roughly only 57 hours were utilised. Since the beginning of the 15th Lok Sabha in 2009, approximately 43 per cent of the allocated time has been spent on question hour. When Parliament is disrupted regularly, its capacity to make laws is affected. Excluding routine financial legislation, since 2009, the government had planned to introduce 390 bills. So far, it has been able to introduce only 187 of them. It had also planned to have 365 bills scrutinised and passed by Parliament. So far, 96 of them have received parliamentary approval. Disruptions in Parliament also eat into the time available for discussing a bill in the house. In Lok Sabha, roughly 35 per cent of bills were passed with an hour or less of debate, a case being the sexual harassment bill, which was passed by Lok Sabha in September of last year in 16 minutes. Some would argue that since parliamentary committees scrutinise most bills in detail, there is no harm done if the bills are not debated in the House. However scrutiny of a bill behind closed doors is hardly a substitute for spirited debates on the merits and demerits of a bill on the floor of the House. Currently there are 115 bills awaiting parliamentary scrutiny and approval. Important social and economic legislation is currently pending before Parliament. The food security bill, the land acquisition bill, the companies and the goods and services tax bill are just a few of them. Out of the laundry list of pending bills, some are political and may be stuck in Parliament till consensus around them can be built. But there are a number of bills that are administrative in nature, and have no political undercurrents and are possibly not coming up for discussion because of the limited time that is available for legislative debate on account of frequent disruptions. In September 1997, to celebrate the golden jubilee of the country's Independence, a special session of Parliament was convened. At this special session, MPs had resolved to preserve and enhance the dignity of Parliament by adhering to the rules of procedure of Parliament relating to the orderly conduct of parliamentary proceedings. Last year, Parliament completed 60 years since its first sitting. To mark the occasion, another special session of both Houses was convened, where MPs had resolved to uphold the dignity, sanctity and supremacy of Parliament. Ensuring that the proceedings of both Houses run smoothly so that Parliament can discharge its responsibility effectively is the best way of ensuring its supremacy. The question that needs to be asked is whether our members of Parliament are ready to stand by the resolutions that they voluntarily adopted.
