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April 19, 2013

On Gujarat’s 2013-14 Budget

Gujarat’s 2013-14 Budget  consolidates the foundation for inclusive, broad-based growth

In India’s public finances, State governments play a crucial role. In 2011-12, the share of states in combined Union and State government’s receipts and disbursements was 56 and 57 percent respectively. The States raise their own budgetary resources, receive Constitutionally mandated share of Union government taxes, make spending decisions, and help administer many Union Government schemes, some of which involve loans and grants. Yet, the state budgets do not receive due recognition in public financial management debates in the country.

It is in the above context that this comment approaches the analysis of Gujarat’s 2013-14 Budget which consolidates the foundations for inclusive broad-based growth laid earlier by initiatives in the power and agricultural sectors, land allocation, skills formation, and infrastructure. The Budget proposes expenditure of Rs.1144 Billion (equivalent to 14.3 percent of GSDP, or INR 19,000 per person).

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Gujarat’s economy is relatively well balanced, with primary, secondary, and tertiary sectors accounting for 21.8 percent, 36.1 percent (manufacturing share is 27 percent), and 42.1 percent of Gross State Domestic Product (GSDP). The share at the national level of manufacturing has ranged between 15 and 18 percent, suggesting that the States with appropriate policy and governance environment can operate under the same national level policies to raise the share of manufacturing significantly above the national average.

The current global recession which has significantly slowed economic growth in high-income countries has however more adversely impacted those States in India, including Gujarat, with relatively higher share in country’s exports and manufacturing. This is reflected in Gujarat’s nominal GSDP growing by on 14.7 percent per year during 2011-12 and 2012-13, as compared to 16.6 percent during the 2004-05 to 2012-13 period.

Gujarat’s GSDP in 2012-13 is estimated at INR 6973 billion, about 7.8 percent of India’s GDP (its share in India’s population is 5 percent). Gujarat’s per capita income at INR 115,600 (USD 2220) is about one and half times that of India as a whole.

There are two major areas which may be used to assess a government budget. The first is the underlying development strategy, and the second is the quality of public financial management.

Development Strategy

Gujarat’s development strategy has focused on incorporating the modern understanding of what makes economies grow which includes quality and quantity of labor, investments, and capital efficiency, and application of knowledge to diverse set of activities to improve economic resource utilisation.

To these Gujarat has also focused on areas such as safety and security of its people, power availability and accessibility, and providing conducive environment for those creating wealth and those in knowledge intensive activities. Gujarat’s growth has been achieved through a combined effort of individuals and businesses from many different States of the country and from abroad.

Along with the usual provisions for roads, ports, transportation, infrastructure, and energy sectors, there are several initiatives in the budget which have the potential to provide opportunities to the population:

  • The budget includes projects to improve productivity in agriculture sector including extending of irrigation facilities to traditionally water scarce regions of Saurashtra, micro-irrigations schemes to conserve water, improve productivity, and knowledge sharing in agriculture.
  • The budget makes a beginning towards providing affordable housing to the increasing number of households that aspire to home ownership.  The budget explicitly recognises that land must be managed as a resource.
  • The initiatives include strengthening The Geographical Information Systems (GIS) digital land recording system, and an online integrated system connecting all the collectors’ offices in Gujarat.

Public Financial Management

There are several indicators which tend to suggest that Gujarat public financial management has been of relatively high quality, though there is room for improvement as will be noted below.

First, Gujarat has been able to contain its fiscal deficits and debt levels. Thus, it had a surplus on the Revenue Account equivalent to around 0.5 percent of GSDP in 2011-12 and 2012-13 respectively, though there was a revenue deficit equivalent of 1 percent of GSDP in 2010-11. The Budget Documents project continuing revenue surplus till 2015-16. The challenge will be to increase the revenue surplus through expenditure efficiencies and more effective revenue generation to enable higher level of capital expenditure.

The overall fiscal deficits, which include capital expenditure, have been relatively modest, averaging 2.5 percent of GSDP during the 2010-11 to 2013-2014 period. This is reflected in the relatively constant public debt to GDP ratio at around 20 percent since 2010-11. The average cost of debt has also shown a downward trend, and was 8.92 percent in 2012-13. The share of interest on public debt in Revenue Expenditure has been reduced from above 20 percent in 2005-06 to 15 percent in 2012-13 (equivalent to 1.6 percent of GSDP).

Gujarat will need to continue to generate high rates of growth, and select capital projects with a view to improving efficiency and competitiveness of the economy if it is to continue to be in a comfortable fiscal deficit and debt positions.

Second, Gujarat’s own revenue receipts have consistently accounted for between three-fourths and four-fifths total revenue since 2004-05. This ratio has been termed by the 13th Finance Commission (FC) as the Fiscal Discipline Index (FDI). The Comptroller and Auditor General’s Report Tabled in the 2013-14 Budget has commended the state for its resource generation initiatives.

The 13th FC reported that for the 2005-06 to 2007-08 period, the national FDI was 62.4 percent, with 19 States and Union Territories, including Bihar (23.4), West Bengal (37.8), and Uttar Pradesh (49.0), exhibiting FDI below the national average. It is hoped the 14th FC, constituted in January 2013, would suggest how the FDI can be increased, and its variability amongst the states narrowed.

There are however several areas where budget presentation and documents could be improved. First, the Budget Speech over emphasises the spending allocations and revenue raising measures, while giving insufficient importance to reporting outputs of government organisations as well as the outcomes for the state as a whole. An exercise which begins to shift from just reporting financial indicators (or inputs), towards performance and outcome budgeting should be the next stage of budgetary development in Gujarat. This will also require a strategy to shift from the current cash accounting methods to accrual accounting methods.

Second, a more formal policy for procurement by governmental organistions in Gujarat would be desirable. This will need to be broadly compatible with the procurement policies being debated at the national level.

Third, the current statements of the Gujarat Fiscal Responsibility Act, 2005 could consider an analysis of fiscal risks which the Gujarat government may face in the future, and the possible strategies to address them. Instituting such a requirement would be helpful as Gujarat’s per capita income rises significantly over the next decade. The statement should also contain estimates of future pension, gratuity, and other such liabilities as well as ways to fund them.

The limitations of the public financial management practices of Gujarat notwithstanding, Gujarat’s 2013-14 Budget is consistent with broad-based inclusive growth, while creating new niches for future economic and social opportunities and empowerment for its residents.

Photo: Salem State Library


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