By Sumarbin Umdor
I have often been asked about the state of finances of Meghalaya. Many of our legislators are perplexed and can’t understand how our present Chief Minister can talk about financial crunch facing the government while at the same time sounding upbeat about the fiscal health of the state. I’m sure these same thoughts also trouble thoughtful citizens of the state. As the state budget of 2017-18 draws near, it is appropriate to evaluate the fiscal issues facing the state.
There are many issues challenging the state on the fiscal front. There is the issue of withdrawal of special category status, NGT ban on coal mining, new pay package for government employees, poor buoyancy of state’s own taxes, declining capital expenditure, terminally ill public sector enterprises, faltering economic growth, to name a few.
Let at first look at the fiscal position of the state. The parameters used to assess the financial health of the states are the in terms of the fiscal and revenue deficit and surplus as well as state debt position. The Twelfth Finance Commission had first introduced the rule based fiscal control in the form of Fiscal Responsibility Act at the state level to check the burgeoning fiscal deficits at sub-national level and ensure better fiscal management by the states. In compliance, the state government enacted the Meghalaya Fiscal Responsibility and Budget Management (MFRBM) Act, 2006 which was amended in 2011 to incorporated recommendation of the Thirteenth Finance Commission.
Fiscal position: The MFRBM (amended) Act of 2011 stipulates for the state government to maintain, for the period 2011-2012 to 2014-15, a numerical targets of surplus in revenue account, a fiscal deficit of below 3 percent of gross state domestic Product (GSDP), and to progressively bring down the outstanding debt to GSDP ratio to 31.7 percent by 2014-15. So how has the state fared in meeting these fiscal targets?
To the credit of the state government, the revenue deficit of the state has been positive from 2012-13 to 2014-15, however the fiscal deficit was breached in 2011-12 and 2014-15. The ratio of outstanding liabilities as a percentage of GSDP has dropped steadily to below 30 percent since 2012-13 and was at 27.1 percent in 2014-15. The reduction of state debt is commendable achievement when compared to debt position of most of the special category states which have much higher debt–GSDP ratio.
However, from 2014-15 the state has been facing serious fiscal challenges that have led to deterioration of the revenue account and fiscal deficit of the state. The adverse effect of coal mining ban on state finances has led to a significant reduction in the amount of revenue surplus which has decreased to Rs. 176 crore in 2014-15 from Rs. 714 crore in 2013-14, as well as the fiscal deficit ratio which crossed the three per cent target in the year the ban was imposed.
Central transfers: As with other special category states, Meghalaya’s dependence on central transfers is very high with own revenue not exceeding 25 per cent of revenue receipts of the state. In recent years, there has been an increasing flow of central funds in the form of central assistance to state plan which touched 40 per cent of revenue receipts in 2014-15. However, the union government has announced an end to the special category status from 2015-16 onwards as a result of which states like Meghalaya stand to lose substantial central grants particularly central assistance for state plans. While the Fourteenth Finance Commission has recommended for a steep increase in vertical devolution to states of 42 per cent of net proceeds of union revenues to cover plan and non-plan expenditure for award period of 2015-16 to 2019-20, special category states are apprehensive that the increased flow of union taxes will not be enough to compensate for the withdrawal of preferential treatment in the allocation of central plan assistance to them. How this new arrangement in central transfers will affect Meghalaya will be known only when we have actual figures for 2015-16?
Own Revenue: The state’s two main sources for internal tax revenues are taxes on sales & trade, and excise taxes which together contribute as about 95 per cent of the state’s own tax receipts. The adverse fall- out of the ban on coal mining on the two main sources of own tax revenues is evident as collection from taxes on sales & trades registered a negligible growth (0.4 percent) in 2014-15 while growth of excise tax was actually negative over the previous year (-7.1 percent). Another issue that is set to further aggravate excise tax collection is the government’s decision taken in April of 2016 to amend the Meghalaya Excise Rules which has led to closure of about 50 per cent of Indian Made Foreign Liquor (IMFL) establishments. In this context, the revenue optimism in excise and sales tax collection as reflected in budget estimates of 2015-16 and 2016-17 defies present conditions.
In 2013-14 the year before coal mining ban was imposed in the state, receipts from mining sector contributed as much as 30 per cent of own revenue of the state. This percentage fell by half to 15 per cent in 2014-15 on account of fall in mineral royalties. With the NGT ruling still enforced, the expected decline in own revenue receipts in coming years will continue to be a major source of fiscal imbalance for the state.
The failure of the government to augment resources from social and economic services other than mineral royalties and forestry is another matter of concern. The state government’s Fiscal Policy Strategy statement (FPST) of 2014-15 acknowledges this situation when it pointed that ‘at present not much revenue is raised by state government from user charges, except for a nominal amount from government school fees, hospital charges, house water connection …’.
Very often the main reason cited for the low revenue generation by the state is attributed to weak economy base. While this is partly true, an equally important factor contributing is rampant tax evasion and revenue leakages. The CAG report for fiscal year 2013-14 pointed put that the state government suffered avoidable revenue losses of almost 600 crore, which is a huge amount for a resource poor state like Meghalaya.
Public Expenditure: On the expenditure front, the increasing revenue expenditure on account of higher salaries and pensions outflows have been at the cost of shrinking capital spending on social and economic activities. The FPST of 2014-15 has committed to reducing the high component of salary expenditure through abolition of redundant post. However, during 2014-15 salary expenditure increased by about 11 per cent over previous year expenditure indicating lack of progress on this issue. The implementation of the recommendations of the State Fifth Pay Commission during fiscal year of 2017-18 will lead to further increase in this component of revenue expenditure which will likely be accommodated by decreasing capital expenditure. The budget estimates of 2016-17 shows considerable scaling down of investments across social and economic sectors as can be seen in the negative annual growth of capital outlays for the fiscal year 2016-17 from that of previous year. Although some measures have been introduced to improve efficiency in public spending, not much headway has been made in expenditure reforms such as lowering of expenditure on salaries and wages, reforms of the state public undertakings, PPP funding of public projects, and others.
Another issue of concern is the rise of contingencies liabilities particularly on account of borrowings by the state owned power utility. In 2014-15 the total outstanding amount of guarantees extended by the state government stood at Rs. 1147 with more than 95 per cent of this amount extended to the power sector. These expanding guarantees pose a risk to state government as the weak financial health of the state owned power companies pose a real danger of these entities failing to generate adequate resources to service the debts in the future.
Our cursory review of the state finances presents a mixed picture. On one hand the state has been able to meet its fiscal targets of revenue surplus and containing the fiscal deficit to GSDP ratio at 3 per cent. It has also been able to progressively lower the outstanding liabilities to GSDP ratio well below the target set out under the MFRBM Act. However, a closer scrutiny of the state finances reveals below par performance in other areas such as mobilisation of own revenues and in expenditure reforms.
The Chief Minister, who is also the finance minister, has a lot in his plate in addressing the fiscal challenges that faces the state and this year’s budget is a right occasion for him to outline the much needed changes and reforms for a better Meghalaya.
(The writer teaches Economics in NEHU )