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)
 
 image
 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.

As of May 29, 2020, there are 1,65,799 confirmed cases of COVID-19 in India.  47,352 new cases have been registered in the last week (since May 22).  Out of the confirmed cases so far, 71,106 patients have been cured/discharged and 4,706 have died.  Most cases are in the state of Maharashtra (59,546) followed by the states of Tamil Nadu (19,372), Delhi (16,281) and Gujarat (15,562).  

With the spread of COVID-19, the central government initially undertook many measures to contain the spread of the pandemic, including restrictions on travel and movement through national lockdown.  With gradual resumption of activities, the central government has recently announced measures to ease restrictions on travel and movement.   Further, the government has continued to announce policy decisions to ease the financial stress caused by the pandemic, and to contain further spread of the pandemic.  In this blog post, we summarise some of the key measures taken by the central government in this regard between May 23 and May 29, 2020.

Figure 1: Day wise number of COVID-19 cases in the country

image

Source: Ministry of Health and Family Welfare; PRS.

Finance

RBI announces additional measures to ease financial stress caused by COVID-19

On May 22, the Reserve Bank of India (RBI) issued a statement with various development and regulatory policies to ease the financial stress caused by COVID-19.   These measures include: (i) improving liquidity in the market; (ii) support to exports and imports; and (iii) easing capital financing.  Subsequently, following measures have been notified by the RBI: 

  • In March 2020, the RBI had permitted all lending institutions to grant a moratorium of three months on payment of all term loans outstanding as of March 1, 2020.   This has been extended by another three months (till August 31, 2020).  Such deferment will not result in downgrade in asset classification.
     
  • For working capital such as cash credit or overdraft as well, lending institutions are permitted to allow a deferment of another three months on recovery of interest (till August 31, 2020). 
     
  • Currently, the exposure limit of a bank to a group of connected counterparties is 25% of the eligible capital base of the bank.  As a one-time measure to ease difficulty in raising funds, this limit has been relaxed to 30% of capital base of bank. 

Travel and Movement 

Domestic Air travel resumes; fare limits set by government

Domestic passenger air travel has been resumed in a phased manned (with one-third capacity of operations) from May 25, 2020 based on the announcement of the Ministry of Civil Aviation on May 21.  To ensure that airlines do not charge excessive fare and to ensure that journey is only for essential purposes, the Ministry of Civil Aviation issued an order to limit the minimum and maximum fare that airlines can charge from the passenger.   The routes have been divided in seven sectors based on the approximate duration of the flight.  For routes with shortest duration (for example, Delhi to Chandigarh), the minimum and maximum fare will be Rs 2,000 and Rs 6,000, respectively.  For routes with the longest duration (for example, Delhi to Thiruvananthapuram), the minimum and maximum fare will be Rs 6,500 and Rs 18,600, respectively. 

Further, the Ministry announced that all operational routes under the Regional Connectivity (UDAN) Scheme with up to 500 km of length or operational routes in priority areas (North East region, hilly states or islands) are permitted to resume operations.  This is in addition to the one-third capacity of operations announced earlier. 

Health

Guidelines for international arrivals issued

The Ministry of Health and Family Welfare issued guidelines for international arrivals.  All travellers are required to give an undertaking that they will undergo a 14-day mandatory institutional quarantine at their own cost (7 days in institutional quarantine followed by a 7-day isolation at home).  In emergency cases (such as pregnancy or death in the family), home quarantine will be permitted.  Use of Aarogya Setu app will be mandatory in such cases.  Only asymptomatic passengers will be allowed to board (flight/ship) after thermal screening.  On arrival, thermal screening will be carried out for all passengers.  The passengers found to be symptomatic will be isolated and taken to a medical facility. 

Movement of migrant labourers

Supreme Court gives an interim order regarding problems of migrant labourers

The Supreme Court of India took cognisance of the problems of migrant labourers who have been stranded in different parts of the country.  In its order, the Court observed that there are lapses being noticed in the process of registration, transportation and in providing food and shelter to the migrant workers.  In view of these difficulties, the Court issued the following interim directions:  

  • Free of cost food should be provided to the migrant workers who are stranded at different places in the country by the concerned state governments.  This information should be publicised and also notified to workers when they are waiting for their turn to board the train or bus.
     
  • The states should speed up the process of registration of migrant workers and provide help desk for registration.  Complete information regarding the modes of transport must be publicised to the workers.  
     
  • Fare should not be charged from migrant workers for travel by train or bus. The railway fare shall be shared by the states as per their arrangement.  The originating state of travel must provide water and meal during transportation.   In case of a train journey, Railways must provide water and meal during the journey. 
     
  • After the migrant workers reach their native place, the receiving state must provide health screening, transport and other facilities free of cost. 
     
  • Migrant workers found walking on highways or roads must be provided transportation to their destination and all facilities including food and water.

The Court directed the central and state governments to produce record of all necessary details such as the number of migrant workers, the plan to transport them to their destination, and the mechanism of registration. 

Other measures

PM CARES Fund included in the list of CSR eligible activities

The Ministry of Corporate Affairs notified the inclusion of PM CARES fund in the list of activities eligible for Corporate Social Responsibility (CSR) under the Companies Act, 2013.  Under the Act, companies with net worth, turnover or profits above a specified amount are required to spend 2% of their average net profits in the last three financial years towards CSR activities. This measure will come into effect retrospectively from March 28, 2020, when the fund was setup

For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.