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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.
We wrote an FAQ on the Lok Pal Bill for Rediff. http://www.rediff.com/news/special/special-parliamentary-committee-cannot-study-lokpal-bill-in-10-days/20110822.htm The Lok Pal Bill has been referred to the Standing Committee of Parliament on Personnel, Public Grievances, Law and Justice. In this FAQ, we explain the process of these Committees. What is the role of such standing committees? The system of departmentally related standing committees was instituted by Parliament in 1993. Currently, there are 24 such committees, organised on the lines of departments and ministries. For example, there are committees on finance, on home affairs, on defence etc. These standing committees examine Bills that are referred to them. They also examine the expenditure plans of ministries in the Union Budget. In addition, they may examine the working of the departments and various schemes of the government. How is the membership of these committees decided? Each committee has 31 members: 21 from Lok Sabha and 10 from Rajya Sabha. Parties are allocated seats based on their strength in Parliament. The final membership is decided based on the MP’s area of interest as well as their party’s decision on allocating the seats. Who chairs the committees? Of the 24 committees, 16 are administered by Lok Sabha and eight by Rajya Sabha. The Chairperson is from the respective House. Political parties are allocated the chairs based on their strength in Parliament. Some committees such as home affairs, finance and external affairs are customarily chaired by a senior member of an opposition party. What will the Standing Committee do with the Lok Pal Bill? The Committee has invited comments and suggestions from the public on the Bill. Comments can be sent to Mr. KP Singh, Director, Rajya Sabha Secretariat, 201, Second Floor, Parliament House Annexe, New Delhi -110001. These may also be emailed to kpsingh@sansad.nic.in or rs-cpers@sansad.nic.in. The Committee will examine the written memoranda. They will also invite some experts and stakeholders for oral evidence. Based on its examination, the committee will prepare a report with its recommendations on the various provisions of the Bill. This report will be tabled in Parliament. Is the report decided by voting? No. The committee tries to form a consensus while preparing the report. However, if some members do not agree on any point, they may add a dissent note. For example, the committee on the Civil Liability for Nuclear Damages Bill had dissent notes written by MPs from the left parties. The Women’s Reservation Bill also had dissent notes from a couple of members. Are the committee’s recommendations binding? No. The Committee system was formed recognising that Parliament does not have the time for detailed examination and public feedback on all bills. Parliament, therefore, delegates this task to the committee which reports back with its recommendations. It is the role of all MPs in each House of Parliament to examine the recommendations and move suitable amendments. Following this, Parliament can vote on these amendments, and finalise the Bill. Can you give examples when the Committee’s work has resulted in significant changes? There are many such instances. For example, the standing committee on science and technology examined the Civil Liability for Nuclear Damages Bill. The committee made several recommendations, some of which increased the potential liability of suppliers of nuclear equipment in case of an accident. All the recommendations were accepted. Similarly, the Seeds Bill, which is currently pending in Rajya Sabha has seen several major recommendations by the Committee on Agriculture. The government has agreed to move amendments that accept many of these recommendations. Are all Bills referred to Standing Committees? Most Bills are referred to such committees but this is not a mandatory requirement before passing a Bill. In some cases, if a Bill is not referred to a committee and passed by one House, the other House may constitute a select committee for detailed examination. Some recent examples include such select committees formed by the Rajya Sabha on the Prevention of Torture Bill, the Wakf Amendment Bill, and the Commercial Divisions of High Courts Bill. There are also some instances when a Bill may be passed without the committee process. Is it a good idea to bypass the committee process? In general, this process provides a platform for various stakeholders to provide their inputs. In the Lok Pal case, a few influential groups such as the India Against Corruption (IAC) and the National Campaign for People’s Right to Information (NCPRI) have voiced their views. However, there may be other points of views of persons who do not have similar access to the media. The Standing Committee provides equal opportunity to everyone to write in their memoranda. It also allows parliamentarians to devote a significant amount of time to understand the nuances of a Bill and make suitable modifications. Thus, the standing committee system is an opportunity to strengthen legislation in an informed and participatory manner. Is it feasible to compress this process within 10 days and get the Lok Pal Bill passed within the current session of Parliament? There should be sufficient time for citizens to provide inputs to the committee. The committee has to examine the different points of view and find suitable provisions to achieve the final objectives. For example, there are divergent views on the role of Lok Pal, its constitution, its jurisdiction etc. The Committee has to understand the implications of the various proposals and then make its recommendations. It has been given three months to do so. Typically, most committees ask for an extension and take six to eight months. It is not practical to expect this process to be over within 10 days. Should civil society demand that the government issue a whip and pass the Jan Lok Pal Bill? Everyone has the right to make any demand. However, the government is duty bound to follow the Constitution. Our Constitution has envisaged a Parliamentary system. Each MP is expected to make up their minds on each proposal based on their perception of national interest and people’s will. Indeed, one may say that the best way to ensure a representative system is to remove the anti-defection law, minimise the use of whips, and let MPs vote their conscience. That may give us a more accountable government.
