Telangana's financial condition
Telangana is one of the youngest states in the country, which was created to meet the aspirations of the people of this part of the country. With required resources, the state had potential to be the forerunner in many aspects and could become one of the developed states in the country. One of the key themes of the Telangana movement was state finances, apart from water and employment. It was anticipated that the state would be governed in a fiscally prudent and responsible manner At the time when the state was formed it was treated as one of the richest states in the country, and within a decade of its formation, it has reached a stage where itis struggling to meet its regular payments, not able to meet its obligations, negotiating with financial institutions to reschedule the payment of installments, etc. Was this because of lack of revenues with the government, overspending by the government, mismanagement of the affairs, etc or the situation is misrepresented for various reasons.
With a geographical area of 1.12 lakh sq. km. and a population of 3.52 crore (2011 Census), it
is the eleventh largest State in terms of area and twelfth in terms of size of population. While 61.12 per cent of the population resides in rural areas, the remaining38.88 per cent lives in urban areas.The per capita incomeof Telangana at current prices was ₹2,78,833 in2021-22, which was 1.86 times of all India average of ₹1,50,007. This is not a new phenomenon that the per capita income of the state is higher than the national average. Even at the time of formation of the state, the per capita income of the state was higher than the national average, with per capita income of 1,24,104 in 2014-15 while the national average was 86,647 in 2014-15. Similarly, the growth of the GSDP of the state has been impressive. At the time of formation of the state Telangana’s contribution to the GDP of the nation was around 4 per cent. The GSDP of Telangana in the year 2014-15 was Rs.5.06 lakh crore at current prices and it gradually rose to Rs.12.93 lakh crore to end of 2022-23.
The growth rate of the GSDP of the state was higher than the national average. The better performance of the state in terms of per capita income, and GSDP indicates that the state was doing better in the last decade. When the state economy does well the same trend should get reflected in the finances of the Government. When the income of the citizens of the state is more, then the consumption of goods and services in the state would be more, when consumption is more there would be more taxes and more revenue to the Government. More revenues should lead to creation of more infrastructure and more facilities to the citizens, and over all performance of the Government in terms of finances should be better.
However, the recent reports released by the Government indicate that the state of finances of the Government is poor. To conclude whether the finances of the Government were managed well or not, one needs to examine the fiscal performance against certain parameters like, ratio of Revenue Receipts to GSDP, Revenue surplus or Revenue Deficit of the State, fiscal deficit of the state, quality of expenditure, fiscal deficit of the state, compliance with the provisions of the FRBM Act, debt position or overall liabilities of the state etc. In the succeeding paragraphs let us examine these parameters.
Revenue Receipts of the State
The revenue receipts of the State have been increasing consistently in the past decade. Revenue receipts can be defined as those receipts that neither create a liability nor cause a reduction in the assets of the government. They are regular and recurring in nature and the government receives them in the normal course of activities. A state’s revenue receipts comprise four components, namely: a) State’s Own Tax Revenue b) Share of Central taxes c) Non-tax revenue and d) Grants from the Central Government. Out of these four components, principle of distribution of Central taxes to the States is done as per the recommendations of the Finance Commission.
A portion of the Grants in aid from the GOI to the State is also decided by the Finance Commission, but major portion of the Grants in aid from the GOI is dependent on the extent to which the State is implementing the Centrally sponsored schemes and providing state share on time. The Revenue receipts of the State which were Rs.51,042 crores in the year 2014-15 when the State was formed, gradually rose to Rs.1,59,350 crore to end of 2022-23. In the current year the collections of the Revenue Receipts already crossed 1,25,000 crore to end of December 2023. Although there had been tax buoyancy during this period as the growth of revenue receipts of the state surpassed, the growth of GSDP in that period, the share of Revenue Receipts to GSDP which was 13.2 per cent in 2015-16 came down continuously every year during the period 2015-16 and 2022-23 indicating that the compliance levels with the tax and other laws in the state were not as they were before.
If only the state could maintain the same level of compliance as it was in 2015-16 and continue to achieve the same ratio of Revenue Receipts (RR) to GSDP the state could have got more revenue. One of the reasons for not able to maintain the same RR to GSDP ratio can be attributed to the state’s reluctance to implement the GOI schemes resulting in lesser grants in aid from the GOI. After the formation of the state the total Revenue Receipts of the Government to end of December 2023 was Rs.10,16,095 crores. This is a substantial revenue if the resources are managed properly.
Revenue Expenditure of the State
Revenue Expenditure is an expenditure the benefit of which accrues to the Government in which it is incurred. Generally, the expenditure like Salaries, interest payments, pensions, and other maintenance expenditure, subsidies etc are treated as Revenue Expenditure. This expenditure is generally recurring in nature. A portion of this Revenue Expenditure is called as committed expenditure, on which the current Government may not have control. Expenditure on account of payment of Salaries, Pensions to Retired Government Servants and Interest payments are treated as committed expenditure.
When the State was formed the the expenditure on salaries and pensions was Rs. 17,130 crores in FY 2014-15 which had increased more than three times to Rs 55,925 crore in FY 2022-23. The growth of expenditure on Salaries and Pensions to employees was disproportionately higher than the growth of the Revenue Receipts of the State during the period mainly due to the Government’s liberal attitude in giving pay revision benefits to the employees. This increase in Salary and pension expenditure should be viewed in the light of the fact that there were huge retirements during this period and there was no new recruitment to that extent leaving a large number of vacancies across the departments in the Government during this period. Another item of committed expenditure which has increased disproportionately to the growth of Revenue Receipts is interest payments. The interest liability of the Government which was Rs.5433 crores in 2015 increased to Rs.32920 crores in the year 2022-23 (including interest on off budget borrowings). This is a phenomenal increase during this period after formation of the state. While the Revenue Receipts of the State increased during period at marginally higher than 3 times, the interest payment expenditure of the State increased beyond 6 times. During this period the Government had paid an amount of Rs.157117 crores towards interest alone.
Over a period of time due to increase in the committed expenditure of the Government, the amount that is available to the Government for implementing various schemes announced by the Government was getting reduced, making the Government dependant more and more on borrowed funds to keep the schemes going. In the year 2014-15 when the State was formed the Revenue Receipts available to the Government for implementing various schemes was Rs.28479 crores which constituted about 55 per cent of the total Revenue Receipts of the Government. Although by the year 2022-23 the amount that is available after meeting the Committed expenditure increased in absolute terms to Rs.70,505, but in terms of percentage of Revenue Receipts got reduced to 44.25 per cent from 55 per cent. Realising the reality of this reduction in the share of the Share of Revenue Receipts after meeting the committed liabilities, the Government should have acted prudently with regard to implementation of various schemes, and limit the expenditure only to those schemes where it is required the most coupled with visibility and social development.
Unfortunately such a prudence was not exhibited due to which the Government had to heavily be dependant on the borrowed funds for implementing various programmes and schemes. Since there were limitations on the extent of borrowings by the Government, the Government adopted innovative methods to borrow funds only to circumvent the rules. Even after that it could not match the disbursements to the receipts which lead to postponement of various commitments of the Government and also piling up of the pending bills with mounting pressure on the finances of the state. This mis match had an ugly impact of increasing the corruption, favoritism, nepotism etc. In this connection it is pertinent to note that while the Government expenditure proliferated during this period the expenditure on important sectors like Education and Health had come down drastically. The expenditure on Education Sector as a proportion to the total expenditure in the State was one of the lowest in the country in the year 2022-23, and the expenditure on health as a percentage of its total expenditure was fourth lowest in the country. Since the Government had neglected these two essential sectors during this period, the citizens of the State had to depend on alternative i.e., private sector which is pinching for the common man and increased the inequalities and propelled distortions.
Borrowings of the Government
As per the provisions of the Constitution a State can borrow from only within the territory of the country. Further as per article 293(3) of the Constitution, the state has to be obtain the prior permission of the Government of India before borrowing any money so long as the State has any outstanding debt to the GOI. Further there are limits on the Borrowings of the State Government prescribed by the Fiscal Responsibility and Budgetary Management Act (FRBM), according to which the total liabilities of the State cannot exceed 25 per cent of the GSDP of the State. As per the recommendations of the Finance Commission, as also the provisions of the FRBM Act, the net annual borrowing of the State cannot exceed 3 per cent of the GSDP of the State.
When the state was formed the outstanding liabilities of the erstwhile combined state of Andhra Pradesh, were divided between the two states in population ratio. Thus the state started with an outstanding debt of Rs.72,658 crores in the year 2014-15 which was lower than 17 per cent of the GSDP of the State. Immediately after the formation of the State, the Government initiated many projects with huge investments and to meet its investment needs, the Government went on borrowing continuously and the total debt of the Government reached 3,52,061 crores to end of 2022-23. With this mounting debt the state had breached the maximum borrowing limit of 25 per cent of GSDP prescribed in the law consecutively for over 2 years. What is more surprising is that even after breaching the limits prescribed in the law, there were many projects which remained incomplete which require huge investments to complete those projects. With the available resources, there is no reasonable prospects of completing these projects in the near future. Since formation of the State of Telangana, the Government has entered into 39,175 work agreements involving 24 departments amounting to Rs 3,49,843 crore, for which Rs 1,89,903 crores expenditure is already incurred by 4.12.2023 and a balance amount of Rs 1,59,940 crores is yet to be spent.
Off budget borrowings of the State
Since there were restrictions on the borrowings of the Government, the state also resorted to extra budgetary borrowings through various corporations, by extending sovereign guarantee. As per the provisions of the FRBM act then in force, the state can give sovereign guarantee upto 90 per cent of the Revenue Receipts of the State. Since the state was in need of more money for funding its various activities, the Government went on borrowing even through the Corporations, and exhausted, this limit very soon, hence to quench the thirst for more borrowing the State had amended the FRBM Act enhancing the limits, of giving guarantee to 200 per cent of the Revenue Receipts. Unfortunately, there was not much of opposition to this amendment either in the Legislature or outside the legislature from the intelligentsia of the State. Thus the State ended up Rs.1,85,029 crores through 17 Special Purpose Vehicles (SPVs)/Corporations to end of 2022-23.
Among the borrowing by the SPVs/Corporations, Kaleshwaram Irrigation Project Corporation Limited (KIPCL) is the major borrower, having borrowed from various sources to finance the Kaleshwaram Lift Irrigation Project. A total expenditure of ₹86,788 crore was incurred on Kaleshwaram Project as of March 2022. The KIPCL has so far drawn loans amounting to over ₹75000 crore towards Kaleshwaram project. There were several irregularities in the execution of the project which are already in the public domain. The officials have over estimated the benefits that would accure to the citizens from the project, and the bankers or financial institutions have also not done due diligence properly before lending funds. What is more interesting to note is that the Banks/Financial institutions did not even bother to examine the existence of approvals to the project before releasing or lending funds.
The officers concerned had falsely projected revenue streams to these SPVs/Corporations only to satisfy the documentation requirements of the Banks and other financial institutions. In fact these SPVs/Corporations did not have their own revenues, due to which the Government was giving financial assistance either in the form of loan or grants in aid to these institutions to meet the debt service obligations of these SPVs/Corporations. Another point of concern is that the top five corporations/entities, which account for 95 per cent of the outstanding government guarantees, availed loans from various financial institutions at average interest rates in the range of 8.93 per cent – 10.49 per cent. This is much higher when compared with the average interest rate of 7.63% for Open Market Borrowings (OMB). In addition to these institutions which did not have any revenue streams of their own and are totally dependent on the Government for debt service obligations, the state had also allowed 14 institutions to borrow an amount of Rs.1,18,557 crores, as these institutions can service the debt from their revenues. As per the white paper released by the Government recently, the total outstanding debt of the State was Rs.6,71,757 crores. If we consider the off budget borrowings also the debt to GSDP ratio of the state would be half the GSDP of the State. What is more surprising is that even after borrowing such huge amounts, there were as many as 4,78,168 bills amounting to Rs.40,154 crores which are awaiting payment for several months. In addition to these bills there were huge liabilities which remained undisclosed such as amounts outstanding to the Banks under interest subvention scheme, debt waiver scheme, etc. and also incentives to be paid to the industries etc.
Borrowed funds should ideally be used to fund capital creation and developmental activities. Using borrowed funds for meeting current consumption and repayment of interest on outstanding loans is not sustainable. Unfortunately, a portion of the Borrowed funds are being utilised for repayment of loans, and also to meet the Revenue expenditure. The total debt servicing burden of Telangana has increased significantly over the last nine years. Over the past decade, there is a discernible absence of visible and substantial infrastructure development that corresponds proportionally with the accumulated debt during this period Revenue Expenditure has also shown a considerable increase in all sectors viz., General Services, Social Services and Economic Services.
Committed Expenditure under Revenue Expenditure increased mainly on account of Interest Payments and Salaries. While interest payments grew due to higher debt burden, payment on account of salaries grew due to implementation of Pay Revision Commission and revision of retirement age of Government employees. The State could not achieve any of the three key fiscal targets i.e., (i) maintenance of Revenue Surplus, (ii) targets of Fiscal Deficit to Gross State Domestic Product (GSDP), and (iii) target of Total Outstanding Liabilities to GSDP for the last two years. In fact, it registered a Revenue Deficit for a third consecutive year. Though the State was disclosing the quantum of Guarantees given to institutions in the Budget documents, to a certain extent, it did not disclose its Off-Budget Borrowings of Rs1,18,955 crore to be serviced from out its resources, this had affected the transparency in the budgets of the State, which is not desirable for a democratic state.
There were abberations in the budgetary process like the compulsory expenditure was under-estimated whereas the scheme expenditure was overestimated. Similarly, budget for the administrative Grant like Fiscal Administration was under-estimated persistently, while welfare and development Grants were over-projected. The Budget did not correspond to reality. On the one hand, receipts were inflated and on the other hand, expenditure was boosted. Owing to the unrealistic estimation of receipts, the departments that incurred expenditure were not able to make payments leading to a spill-over of their commitments.
The State has, been persistently trailing in respect of expenditure on education and Health when compared to the other General States. Capital Expenditure, as a percentage of Total Expenditure decreased from 26 per cent in 2017-18 to 21 per cent in 2021-22. The state has launched many schemes which are not sustainable considering the finances of the Government. Thus a state despite having good resources had earned a bad reputation of not able to meet its day to day payments. There is an urgent need for the citizens to be aware of the actual financial situation of the state, and bring pressure on the Government to initiate corrective action immediately if necessary by taking some hard decisions. The social groups should discuss the issues based on facts and come out with suggestions for putting the derailed financial situation back on track.
Leave a Comment