Economic survey pours cold water on Dr Thomas Isaac's hopes

THIRUVANANTHAPURAM: If the Economic Survey can be considered the weathercock of the Centre’s thinking, then finance minister Dr Thomas Isaac’s hope of an increased borrowing limit for states stands dashed. Dr Isaac wanted the borrowing limit increased by at least 0.5 per cent from the existing 3 per cent of the GSDP. The Survey, which was tabled in Parliament on Tuesday, makes a strong case for increased fiscal prudence on the basis of its inference that the fiscal condition of states had actually improved after the Fiscal Responsibility Legislation (FRL) was introduced in 2005. This is not to say that the Survey considers certain relaxations as a sort of fiscal heresy. Quite the contrary; the Survey argues for incentives to be provided to better-performing states.

But the problem for a state like Kerala is that the Survey, like the Thirteenth Finance Commission, prefers that the Centre base its assessment on tax collections, an indicator where for the last few years Kerala has badly under-performed. The Survey even says that there is “considerable merit” in offering such an incentive. Unfortunately for the State, its average tax collection growth has hovered around a lowly 12 per cent for the last two years; after demonetisation it had even gone negative. This could mean that the State would be deemed ineligible for the kind of fiscal relaxation that Dr Isaac had yearned for.

The finance minister’s thinking was that the fiscal shock imparted by demonetisation will force even the Centre to blow up its deficits to facilitate more spending. But the Survey warns the Centre against fiscal deviation. It subscribes to the charge that the Centre, unlike the states, has been imprudent in containing its deficits. Therefore, it wants the Centre to be a model to the states when it comes to fiscal prudence. The Survey sings paeans for fiscal conservatism. “Fiscal responsibility legislations (FRLs) clearly made an important difference, both in terms of outcomes and behaviour. States kept their average fiscal deficit at 2.4 per cent of GSDP in the 10 years after the FRL, well below the prescribed ceiling of 3 per cent of GSDP,” the Survey notes. Revenue receipts also showed an increase from about 12.3 per cent of GSDP on average to 14.2 per cent of GSDP after FRL. It also states that there was “striking change” in the behaviour of states after fiscal responsibility was ushered in.

“Budget forecasting procedures improved, and there was a more cautious approach to guarantees, a build-up of cash balances, and a reduction in debt,” The Survey listed out the gains. Borrowing by state utilities also fell after the advent of FRL, from 4.3 per cent of GSDP to 3.4 per cent of GSDP. After FRLs came into being, there was also a sharp drop in the magnitude of the revenue forecast errors. “Strikingly, the errors actually turn negative, which means the budget projections are pessimistic. Budget forecasts of own tax r evenue, for example, are on average 0.6 per cent lower than the actuals after the FRL. The same caution is seen in estimates of expenditure. These are all encouraging signs that FRL actually made a difference to the way states approached their budgets,” the Survey noted.