CHAPTER 2

STATE FINANCES
Finances of state governments are directly tied to the prevailing economic conditions. The consolidated fiscal position of the State governments witnessed significant improvement in the recent years as reflected in major deficit indicators, viz., revenue deficit (RD), gross fiscal deficit (GFD) and primary deficit (PD) as a ratio to GDP. An improvement in the fiscal situation in recent years has been achieved by pursuing the fiscal correction and consolidation process under a rule-based fiscal framework. The efforts of the State governments towards reducing fiscal imbalances were aided by larger devolution and transfer by the Twelfth Finance Commission (TwFC) through shareable Central taxes (higher buoyancy of Central taxes aided higher devolution) and grants. Higher GDP growth for the period extending to 2007-08 facilitated higher revenue mobilisation. Consequent upon these developments, the State governments achieved revenue surplus for the second successive year during 2007-08 (Accounts). The revenue surplus as per cent of GDP was higher at 0.9 per cent in2007-08 (Accounts) as compared with 0.6 per cent in 2006-07. Reflecting the improvement in the revenue account, the GFD-GDP ratio also declined to 1.5 per cent in 2007-08 (Accounts) from 1.8 percent in 2006-07. However, due to the moderation in economic growth during 2008-09, the revenue buoyancy suffered a setback and aggregate expenditure shot up. As a result the level of revenue surplus declined and the GFD-GDP ratio increased significantly. The key fiscal indicators are estimated to deteriorate further in 2009-10. In short, the pace of fiscal correction and consolidation appears to have taken a pause in 2008-09 (RE) and 2009-10 (BE). 2.2 Setback to States fiscal position witnessed during 2008-09 is estimated to worsen further in 2009-10 as is evident from budget estimates of key deficit indicators. During the period of subdued growth, it is generally perceived that governments attempt to raise public investment to generate aggregate demand. With global economy experiencing a severe slowdown, many advanced and emerging economies announced fiscal stimulus measures in order to boost domestic demand and revive economic activities. A few state governments have announced fiscal stimulus packages envisaging higher spending and lower tax rates for certain sectors in order to boost aggregate demand (see Box.2.1). Consequently, the overall gross Fiscal Deficit (GFD) GDP ratio is estimated to increase to 3.2 percent in 2009-10 (B.E) from 2.6 percent in 2008-09 (R.E) and 1.5 percent in 200708 (Accounts). As the recovery process sets in, the State need to return to the path of fiscal consolidation. The key fiscal deficit of all states are given in Table 2.1. Table - 2.1 Key Fiscal Deficits of All State Governments (` Crore)
Year 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 (RE) 2009-10 (BE) Gross Fiscal Deficit 74254(4.2) 91480 (4.7) 89532 (4.3) 95994 (4.2) 102123(4.1) 123070 (4.5) 109257 (3.5) 90084 (2.5) 77509(1.9) 75455 (1.5) 146349(2.6) 199510 (3.2) Revenue Deficit 43642 (2.5) 53797 (2.7) 53569 (2.5) 59188(2.6) 555111 (2.2) 61145 (2.2) 36423 (1.2) 7013 (0.2) (-) 24857 (- 0.6) (-) 42943 (- 0.9) (-) 10701(-0.2) 32295 (0.5) Primary Deficit 38381 (2.2) 46309 (2.4) 37830 (1.8) 333488 (1.5) 31981 (1.3) 41306 (1.5) 21268 (0.7) 6060 (0.17) -15654 (-0.4) -24376 (-0.5) 40128 (0.7) 83083 (1.3)

Source : State Finances : A study of Budgets of 2009-10 by RBI (Figures in brackets are percentage to GDP)

5
Negative (-) sign indicates surplus

Box.2.1 Fiscal Stimulus Measures at State Government Level in India The recent global financial crisis and the consequent ongoing macroeconomic global downturn necessitated many countries both advanced and emerging market to undertake fiscal stimulus measures to cushion the impact on domestic economy. Many countries have already introduced/announced fiscal stimulus packages. In the Indian context, in keeping with the larger responsibilities assigned to the States, the consolidated State Government expenditure accounts for a substantial portion of the total Government sector expenditure (Centre and States), which stands higher than in several other countries such as Australia, Denmark, Argentina, USA and Germany. The State Governments account for about 60 percent of the combined expenditure of the Centre and the States reflecting the States vital role for growth and development of the economy. While the State Governments collect about one-third of the total Government sector receipts, they incur more than three-fourth of the total expenditure on social services and more than half of that on economic services. However, there is little evidence of explicit counter-cyclical fiscal measures at the subnational level for 2009-10 as only a few State Governments have announced dedicated fiscal stimulus packages. These States include Kerala, West Bengal and Haryana. The Kerala Government announced a stimulus package of ` 10,000 crore to be spent directly by the Government and Quasi-government organisations over two years for infrastructure development through loans or grants. Unlike Kerala and Haryana, the stimulus package by West Bengal Government appears to focus on boosting demand through revenue expenditure rather than capital expenditure. Although no major stimulus-related tax measures have been announced at the Statelevel, States like Rajasthan, Punjab, Karnataka and Chhattisgarh announced certain tax exemptions/reductions. (Source: State Finances- A study of Budgets of 2009-10, RBI)

Kerala Overall Fiscal Position

2.3 The impact of the economic recession undermined the fiscal consolidation process of both the central and the state governments. On the one hand, the growth of revenue receipts declined because of the economic slowdown and, in the case of Central Government, also because of the reduction in the excise and customs duties. On the other hand, the Central Government and to an extent the State Governments were forced to declare stimulus packages and also incur additional social security expenditure. As a result the revenue and fiscal deficits of the Central Government sharply increased. The borrowing ceiling of the State Government was raised from 3 percent to 4 percent of the GSDP. Most of the states that had achieved revenue surplus as a result of the fiscal consolidation went into red. The time trajectory of FRBM Act had to be given up. 2.4 The economic down turn in the domestic economy of the state was much lower than what was expected. The growth of the state domestic economy by 14.57 percent helped to moderate a sharp increase in revenue and fiscal deficits as a ratio to the GSDP.The major deficit indicators for the period from 1999-2000 to 2010-11(BE) are given in Table 2.2. The revenue deficit increased to ` 5022.97 crores, during 2009-10 about 35 percent higher when compared to the previous year. The revenue deficit to GSDP ratio had declined from 2.16 percent in 2007-08 to 1.85 percent in 2008-09, but it increased back to 2.18 percent in 2009-10. Similiarly there was a sharp increase in fiscal deficit to ` 7871.60 crores, about 24 percent above the previous year. As a result the fiscal deficit to GSDP ratio that had declined from 3.48 percent in 2007-08 to 3.16 percent in 2008-09, increased back to 3.42 percent in 2009-10. The quality of the fiscal deficit also deteriorated. While 58 percent

Economic Review 2010

of the fiscal deficit was utlised for financing revenue deficit in 2008-09, the share increased to 63 percent in 2009-10. 2.5 The deceleration in the revenue receipts is primarily responsible for the deterioration of the fiscal balance in state. The total expenditure of the state Government increased to 13.366 percent in 2008-09 when compared to the previous year. It grew only by 10.24 percent in 2009-10. In contrast the growth of revenue declined from 16.13. percent in 2008-09 to 6.52 percent in 2009-10. States own resources increased only 11 percent. The central transfer declined 4.74 percent. An important feature of the 2009-10 is the initiation of ` 5000 crore stimulus package consisting of investment in infrastructure. Even though the actual expenditure during 2009-10 did no pick up as fast as it was expected given the very nature of this investment project it gave an important psychological boost to the economy. Table - 2.2 Major Deficit Indicators (` crore)
Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 201011(BE) Source: Finance department, Govt. of Kerala Revenue Deficit Amount % to GSDP 3624.21 5.8 3147.06 4.51 2605.64 3.28 4118.66 4.53 3680.30 3.83 3668.92 3.08 3129.15 2.29 2637.95 1.72 3784.84 2.16 3711.67 1.85 5022.97 2.18 3629.55 1.37 Fiscal Deficit Amount % to GSDP 4534.56 7.25 3877.8 5.56 3269.4 4.12 4990.04 5.49 5539.05 5.77 4451.90 3.73 4181.72 3.06 3821.87 2.49 6100.21 3.48 6346.21 3.16 7871.60 3.42 8543.28 3.22 Primary Deficit Amount % to GSDP 2582.29 4.13 1620.20 2.32 779.94 0.98 2043.28 2.25 - 2210.75 - 2.30 -839.36 - 0.70 -382.00 - 0.28 +367.83 0.24 -1770.56 1.01 -1686.52 - 0.84 -2579.12 - 1.12 -2756.80 -1.04

Financial Indicators
2.6 The Balance from Current Revenue (BCR) deteriorated from ` (-) 712 crore in 2005-06 to ` (-) 2749 crore in 2007-08 and started improving thereafter. In 2009-10, it was ` (-) 2155 crore and estimated to reach at ` (-) 554.07 crore during 2010-11(BE). The interest ratio was as high as 0.25 in 2005-06. It steadily declined thereafter and came to 0.19 in 2008-09. This ratio slightly rose in 2009-10 to 0.20 mainly due to the decline in the growth of revenue receipts. 2.7 The utilization of significant portion of the capital receipts of the state for capital assets creation always remains as an unattainable task due to the diversion of borrowed funds to bridge the gap between revenue receipts and revenue expenditure. This situation started to improve slightly from 2006-07. The ratio of capital outlay to capital receipts that was as low as 0.17 in 2005-06 improved moderately to 0.27 in 2008-09. The steady improvement received a setback in 2009-10 when the ratio remained at 0.26. 2.8 The return of investment ratio continued to be very stumpy during 2008-09 also, while the ratio on asset liabilities remained unchanged. The ratio of outstanding Guarantees to Revenue Receipts was as high as 0.91 in 2004-05 declined progressively to 0.31 in 2008-09.

Economic Review 2010

2.9 The important financial indicators for the period from 2005-06 to 2010-11(BE) are given in Table 2.3. Table - 2.3 Financial Indicators for Government of Kerala
Particulars BCR (` crore) Interest Ratio Capital Outlay/ Receipt Return of Investment ratio Outstanding Guants/ Revenue Receipt Assets/ Liabilities 2005-06 - 712.00 0.25 0.17 0.008 0.78 0.4 2006-07 -1332.00 0.23 0.22 0.013 0.52 0.40 2007-08 - 2749 0.21 0.24 0.011 0.39 NA 2008-09 - 2306 0.19 0.27 0.012 0.31 NA 2009-10 - 2155 0.20 0.26 0.008 NA NA 2010-11 BE) -554.07 0.19 0.51 NA NA NA

Source : Finance department. Government of Kerala

Pattern of Revenue Receipts 2.10 The States Own Revenue and Central transfers in the form of shared taxes and grants for plan and non-plan purposes are the components of the total revenue of the State. The adverse impact of the economic slow down on states major revenue contributors together with the reverse growth in the receipts of central transfers affected the revenue receipts of the state very seriously during 200910. The revenue receipt to GSDP ratio which was 11.18 percent in 2005-06 had steadily improved to 12.19 percent in 2008-09. But it declined to 11.34 percent in 2009-10. Even in this period of economic slow down the states own tax resources revealed surprising resilience. The States own revenue relative to GSDP slightly declined to reach around 8.46% during 2009-10 against 8.73% of 2008-09. But it remained at around the same level in preceding years. Against the buoyant growth rate during the previous two years, States own Non tax revenue declined to reach to 18% in 2009-10 from 28% in 2008-09. The significant decline in the growth rate of central transfers brought its share in the revenue receipts down from 28% in 2008-09 to 25% of 2007-08. There was substantial shortfall of ` 330.55 crore in central transfers. The revenue buoyancy of the State declined severely from 1.09 in 2008-09 to 0.45 in 2009-10. States own revenue buoyancy also came down from 1.21 to 0.75 during the corresponding period. 2.11 The total revenue receipts of the State for the period from 1999-2000 to 2010-11 is shown in Table 2.4. The total receipts is estimated to increase by ` 5071.42 crore (19.42%) in 2010-11 (BE) as against the increase of ` 1597.22 crore (6.52%) in 2009-10 2.12 The below Table shows that average annual growth rate of revenue receipts during the last 12 years is 13.09 %. The component wise average annual growth rates are: States own tax revenue by 13.49 %, States own non tax revenue by 13.60%, states own revenue by 13.43% and share of central taxes and grants-in-aid by 12.66 %. The revenue receipt of the state increased from ` 7941.75 crore in 1999-2000 to ` 31180.82 crore in 2010-11 (BE).

Economic Review 2010

Table - 2.4 Revenue Receipt (` crore)

States own Tax Revenue Year
Amount Growth rate Amount Growth rate

States own Non Tax Revenue

State's Own Revenue (2+4)

Amount Growth rate

Share of Central Taxes and Grants

Amount Growth rate

Total Revenue (6+8)

Amount Annual Growth rate

1 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 AAGR

2 5193.51 5870.26 5923.42 7302.54 8088.78 8963.65 9779.64 11941.82 13668.95 15990.18 17625.02 20884.23

3 11.70 13.03 0.91 23.28 10.77 10.82 9.10 22.11 14.46 16.98 10.22 18.49 13.49

4 530.71 659.09 543.38 681.26 806.98 819.08 936.77 937.57 1209.55 1559.29 1852.22 2314.31

5 -4.83 24.19 -17.56 25.37 18.45 1.50 14.37 0.09 29.01 28.92 18.78 24.95 13.60

6 5724.21 6529.35 6466.8 7983.8 8895.76 9782.73 10716.41 12879.39 14878.50 17549.47 19477.24 23198.54

7 9.93 14.07 -0.96 23.46 11.42 9.97 9.54 20.18 15.52 17.95 10.98 19.11 13.43

8 2217.53 2201.51 2589.59 2653.58 2919.61 3717.75 4578.11 5307.23 6228.29 6962.71 6632.16 7982.28

9 11.38 -0.72 17.63 2.47 10.03 27.34 23.14 15.93 17.35 11.79 -4.74 20.36 12.66

10 7941.75 8730.86 9056.39 10637.38 11815.37 13500.48 15294.52 18186.62 21106.79 24512.18 26109.40 31180.82

11 10.33 9.94 3.73 17.46 11.07 14.26 13.29 18.91 16.06 16.13 6.52 19.42 13.09

Source : Finance Department, Govt. of Kerala

States Own Tax Revenue 2.13 The growth rate in States own tax revenue declined temporarily during 2009-10, when compared to the relatively healthy trend existed in previous years. The estimated growth rate in States own tax revenue for 2010-11 BE is 18.49 percent against the actual growth rate of 10.22 percent in 2009-10. States own Tax Revenue for 1999-2000 to 2010-11(BE) are given in Table 2.5. The total own tax revenue realized during 2009-10 was `17625.02 crore and the budget estimate for 2010-11 is ` 20884.23 crore. Sales tax was the major source of State's own tax revenue during 200910 having contributed ` 12770.89 crore (72.40 percent) followed by stamps and registration fees ` 1896.41 crore (10.75 per cent). The detrimental effects of global economic downturn seriously affected the contributions from Stamps and Registration during 2009-10. The contributions from stamps and registration that decelerated to ` 2002.99 crore incin 2008-09 from ` 2027.97 crore in 2007-08, further declined to reach to ` 1896.41 crore during 2009-10. State excise accounted for ` 1514.81 crore (8.59 per cent), motor vehicle tax for ` 1131.10 crore (6.42 percent) and Land revenue for ` 53.93 crore (0.31 per cent) 2.14 The annual average growth rate of States own tax revenue during the period 1999-2000 to 2010-11 was 13.49 %, 20.11 % for land revenue, 19.18 %for stamps and registration fees, 11.65 % for state excise duty, 13.50 % for sales tax and 12.47 %for motor vehicle tax.

Economic Review 2010

Table - 2.5 State's Own Tax Revenue (` crore)

Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 201011(BE) AAGR Land Revenue 34.67 39.35 34.93 38.40 40.59 43.85 43.88 47.01 47.21 47.56 53.93 155.13 20.11 Stamps and Registration fees 279.65 341.10 394.28 486.53 549.81 775.35 1101.42 1519.93 2027.97 2002.99 1896.41 2187.51 19.18 State Excise Duties 591.10 688.94 541.46 663.07 655.91 746.45 841.00 953.07 1169.25 1397.64 1514.81 1836.21 11.65 Sales tax 3853.54 4344.33 4440.85 5343.15 5991.43 6701.05 7037.97 8563.31 9371.76 11377.13 12770.89 15125.69 13.50 Motor vehicles tax 380.83 394.85 452.18 513.20 585.78 610.48 628.51 707.74 853.17 937.45 1131.10 1301.86 12.47 Others 53.72 61.69 59.72 258.20 265.26 86.47 126.86 150.76 199.59 227.41 257.88 277.81 30.68 Total 5193.51 5870.26 5923.42 7302.55 8088.78 8963.65 9779.64 11941.82 13668.95 15990.18 17625.02 20884.23 Annual Growth rate 11.70 13.03 0.91 23.28 10.77 10.82 9.10 22.11 14.46 16.98 10.22 18.49 13.49

Source : Finance Department, Govt. of Kerala

States Own Non-Tax Revenue 2.15 The component-wise details of non-tax revenue receipt from 1999-2000 to 2010-11 are shown in Table 2.6. The annual growth rate in States Own Non-Tax Revenue is 18.79 % during 2009-10 and in actual terms it increased to ` 1852 crores against ` 1599 crore during 2008-09. The revenue from major components of non-tax revenue, except social development services has increased during 2008-09 over the previous year. The revenue from social development service was `310.96 crore during 2008-09 and fell to `294.64 crore in 2009-10. Table - 2.6 State's Own Non-Tax Revenue (` crore)
Forest Year
Amoun t Annual Growth rate

Debt Services (interest)

Amount Annual Growth rate

Social Development Services*

Amount Annual Growth rate

Others
Annual Growth rate

Total
Amount Annual Growth rate

Amount

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(BE)

109.88 141.24 113.70 149.50 187.18 199.69 189.63 174.56 154.45 223.71 272.80 360.11

-9.21 28.54 -19.50 31.56 25.14 6.68 -5.04 -7.94 -11.52 44.84 21.94 32.00

37.31 36.81 31.08 35.86 32.40 40.51 46.35 44.63 69.65 83.69 152.50 119.43

-47.42 -1.34 -15.57 15.38 -9.65 25.03 14.42 -3.71 56.06 20.16 82.22 -21.69

118.41 165.07 135.51 185.67 207.90 209.85 236.67 242.26 369.76 310.96 294.64 736.42

-3.46 39.36 -17.88 37.02 11.97 0.94 12.78 2.36 52.61 -15.90 -5.25 149.94

265.11 315.97 263.09 306.73 379.50 369.03 464.12 476.12 615.69 940.93 1132.28 1098.35

9.09 19.18 -16.74 17.89 22.36 -2.76 25.77 2.59 29.30 52.83 20.34 -3.00

530.71 659.09 543.38 677.76 806.98 819.08 936.77 937.57 1209.55 1559.29 1852.22 2314.31

-4.83 24.18 -17.55 24.64 19.15 1.50 14.37 0.09 29.01 28.91 18.79 24.95

Source : Finance Department, Govt. of Kerala * It includes education, medical and public health, Agriculture, Rural Development, Animal Husbandry, Co-operation, Industries, Community Development and miscellaneous Social Development Organisation

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2.16 Component wise realization of own Non Tax Revenue of Kerala and all States from 2007-08 to 2009-10 are given in Table 2.7 General Services and Economic Services together account for more than three fourth of the own-non tax revenue of the State for 2009-10. Table - 2.7 Component-wise realisation of Own- Non Tax Revenue-Kerala & All States (` crore)
2007-08 Accounts Items States Own-Non tax Revenue Interest receipts Dividend & Profit General Services (Of which) State Lottories Social & Community Service Economic Service (Of which) Forestry & Wild Life Kerala 1209.55 (100.00) 69.65 (5.76) 28.63 (2.37) 526.09 (43.49) 325.25 (26.89) 147.79 (12.22) 437.39 (36.16) 154.45 (12.77) All states 77178.52 (100.00) 12637.21 (16.37) 569.53 (0.74) 26397.07 (34.20) 5130.01 (6.65) 7889.2 (10.22) 29684.29 (38.46) 2517.62 (3.26) 2008-09 (RE) Kerala 1296.77 (100.00) 78.53 (6.06) 32.36 (2.50) 618.56 (47.70) 420 (32.39) 169.6 (13.08) 397.73 (30.67) 211.99 (16.35) All States 79613.86 (100.00) 16572 (20.82) 477.2 (0.60) 20546.70 (25.81) 5212.81 (6.55) 6785.25 (8.52) 35210.41 (44.23) 2625.23 (3.30) 2009-10 (BE) Kerala 1459.58 (100.00) 89.20 (6.11) 36.56 (2.50) 697.87 (47.81) 474.6 (32.52) 188.54 (12.92) 447.42 (30.65) 227.8 (15.61) All States 84017.18 (100.00) 13010.06 (15.48) 497.01 (0.59) 26706 (31.79) 5859.96 (6.97) 7054.69 (8.40) 36749.32 (43.74) 3012.13 (3.59)

Source : State Finances : A study of Budgets of 2008-09 by RBI (Figures in brackets are percentage to State's own Non-Tax Revenue.)

2.17 A comparative position of non-tax revenue with the neighboring states during 2009-10 (B.E) is given in Table 2.8. It reveals that the non-tax revenue realized by Andhra Pradesh, Karnataka and Tamil Nadu are 16.91 percent, 4.51 percent and 5.74 percent respectively of their total revenue expenditure whereas for Kerala it is 4.68 percent. Similarly the ratios of non tax revenue to the revenue receipts for Andhra Pradesh, Karnataka and Tamil Nadu are 16.39 percent, 4.40 percent and 5.84 percent respectively and for Kerala it is 5.18 percent Table - 2.8 Comparative Position of States Own Non-Tax Revenue in Neighboring States: 2009-10 (BE) (` crore)
Items Own Non tax Revenue Revenue Expenditure Revenue Receipts NTR/RE (percentage) NTR/RR (percentage) Andhra Pradesh 12946.00 76557.17 78963.70 16.91 16.39 Karnataka 2129.51 47237.66 48389.04 4.51 4.40 Tamil Nadu 3404.27 59295.28 58271.14 5.74 5.84 Kerala 1459.58 31161.84 28153.89 4.68 5.18

Source : State Finances : A study of Budgets of 2009-10, by RBI

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Central Transfers
2.18 The main components of central transfers to the state are tax devolution and grants. As regards the growth rate in central transfers to Kerala, it continued to fluctuate throughout the years since 1999-2000. The central transfers to Kerala during the period from 1999-2000 to 2010-11 is shown in Table 2.9. 2.19 The Central Transfers have been a volatile source of revenue to the state ranging from 10% to 27% between 2003-04 and 2007-08 it increased by 11.79 percent when compared to the previous year. But in 2009-10, it declined by 4.75 percent. Absolute decline in the Central Transfers is indeed a rare phenomenon and it imposed severe strain on the state finance. As a result the share of Central Transfers in the revenue receipts which was around 28-29% declined to 25.47 percent in 2009-10. The ratio of central transfers to GSDP which was around 3.3-3.5% declined to 2.88 percent in 2009-10. The allocation of Central Taxes to the State of Kerala varied between 3.50% and 4% of the total sharable taxes as recommended by various Finance Commissions from 2 nd FC period to 10th FC period. This ratio fell largely to 3.06% in the 11 th Finance Commission period. It declined further to 2.67% and 2.34% correspondingly in the subsequent Finance Commission recommendations Table - 2.9 Central Transfers: 1999-00 to 2010-11
Share in Central taxes & Duties Amount 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 (BE) 1535.22 1585.61 1614.26 1715.21 2012.00 2404.95 2517.18 3212.00 4051.70 4275.52 4398.78 4825.76 Annual Growth rate 11.06 3.28 1.81 6.25 17.31 19.53 4.67 27.60 26.14 5.52 2.88 9.71 Grant-in-aid and other receipts from Centre for Plan & Non-Plan Annual Amount Growth rate 682.31 12.11 615.90 -9.73 975.33 58.36 938.37 -3.79 907.61 -3.28 1312.80 44.64 2060.93 57.00 2095.23 1.66 2176.59 3.88 2687.19 23.46 2233.38 -16.89 3156.52 41.33

(` crore)
Total Transfers Amount 2217.53 2201.51 2589.59 2653.58 2919.61 3717.75 4578.11 5307.23 6228.29 6962.71 6632.16 7982.28 Annual Growth rate 11.38 -0.72 17.62 2.47 10.03 27.34 23.14 15.93 17.35 11.79 -4.75 20.36

Year

Source : Finance Department, Govt. of Kerala-2011

2.20 Regarding Central Transfers to States, Keralas position is the lowest (2.39 percent). Andhra Pradesh is at the top position getting 7.15 percent of the total transfers followed by Tamil Nadu (4.60 percent) and Karnataka (3.82). Central transfers in Kerala and neighboring states during 200910 are given in Table 2.10

Table 2.10 Comparative position of Central Transfers to Neighboring States

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State Andhra Pradesh Karnataka Tamil Nadu Kerala All Sates

Share of Central Taxes 12109 7645 9096 5417 185720

2009-10 (B.E) Grant from Total Amount Centre 13244 25353 5893 13538 7193 16289 3049 8466 168683 354403

Percentage 7.15 3.82 4.60 2.39 100.00

Source : State Finances : A study of Budgets of 2009-10 , RBI

Expenditure Pattern Revenue Expenditure 2.21 The Revenue Expenditure may be for developmental or non-developmental purposes. The expenditure on services such as Education, Health, Agriculture, Animal Husbandry, Industries etc. constitutes developmental expenditure. The non-developmental expenditure includes the expenditure on interest payments, pension payments and salaries for regulatory departments. The trend in revenue expenditure for the period from 1999-2000 to 2010-11 is given in Table 2.11. The annual average growth rate of revenue expenditure for the last twelve years is 12.05 percent. The revenue expenditure during 2009-10 was ` 31132.38 crore higher by ` 2908.53 crore over the corresponding figure for 2008-09 registering a growth rate of 10.31 per cent. The budget estimate for the period 2010-11 shows an increase in revenue expenditure by ` 3677.99 crore over 2009-10; growth at a rate of 11.81 per cent. The estimated share of development expenditure to total revenue expenditure during 2010-11 (BE) is 55.14%. Similarly, the BE for 2010-11 on Non Development expenditure is 44.86 percent to total revenue expenditure. Table - 2.11 Trend in Revenue Expenditure (` crore)
Total Revenue Expenditure Year Amount 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(BE) 11565.96 11877.92 11662.03 14756.05 15495.67 17169.41 18423.58 20824.57 24891.64 28223.85 31132.38 34810.37 Annual Growth rate 25.33 2.69 -1.18 26.53 5.01 10.80 7.30 13.03 19.53 13.39 10.31 11.81 Development Expenditure % to total Amount Revenue expenditure 6510.24 56.29 6396.50 53.85 6028.34 51.69 8064.80 54.65 8061.94 52.03 9244.45 53.84 9757.79 52.96 9283.26 44.58 12332.42 49.54 15154.25 53.69 16633.43 53.43 19195.45 55.14 Non Development Expenditure % to total Amount Revenue expenditure 5055.72 43.71 5481.42 46.15 5633.69 48.31 6691.25 45.35 7433.73 47.97 7924.95 46.16 8665.79 47.04 11541.31 55.42 12559.22 50.46 13069.60 46.31 14498.95 46.54 15614.92 44.86

Source : Finance Department, Govt. of Kerala,2011

2.22 The trend in revenue expenditure shows that during 2009-10 it was `31132.38 crore with a growth rate of 10.31 per cent over the previous year. All the components in State revenue expenditure increased during 2009-10 compared to the previous year. (see Appendix 2.1).

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2.23 The annual average growth rate from 1999-2000 to 2010-11 shows that on development expenditure, which includes Education, Health, Agriculture, Animal Husbandry, Co-operation, Industries, Labour, Employment and others, it is 11.49 percent whereas the non development expenditure is around 13.56 percent. Among development expenditure the annual average growth rate on education is 11.44%, health 11.95%, agriculture and allied sector 9.25%, Industries it is 12.41% and other sectors 14.85%.

Capital Expenditure
2.24 An important feature of the state Finance in the recent period has been relatively faster growth of the capital expenditure. The trend in capital expenditure and total expenditure from 1999-2000 to 2010-11 is given in Table 2.12. The capital expenditure in the state has been on the upward swing since 2004-05 continued to maintain its trend during 2009-10 also. It increased from `681.75 crore in 2004-05 to ` 2936.06 crores in 2009-10 and its percentage to total expenditure increased from 3.78 to 8.62 during the same period. The sector wise capital expenditure and its growth rate are given in Appendix 2.2. The capital expenditure was in the range of less than 1 percent of GSDP for a few years preceding 2007-08. The ratio of capital expenditure to GSDP was 1.35 in 2007-08. But it remained at 1.33 during 2008-09 and 1.27 in 2009-10. Public works claimed 44% of the total expenditure. Irrigation came second with 12% share. An interesting feature is sharp increase in the share of industries which was only 3.8% in 2005-06. It increased to 13.9 percent in 2008-09. However in 2009-10 it declined to 9.8% . 2.25 The state continued to provide substantial loan disbursement also to various sectors during this period. Capital expenditure together with loan disbursements has been around 1.35 as percent of the GSDP. The significant improvement in capital expenditure to GSDP for last few years was due to the states consistent effort to invest in the area by providing adequate funds despite of fiscal constraints. Table - 2.12 Capital Expenditure and Total Expenditure: 1998-99 to 2009-10 (` crore)
Capital Expenditure Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(BE) Amount 648.18 577.20 558.36 698.66 639.71 681.75 816.95 1251.97 2367.74 2679.29 2936.06 4979.47 Annual Growth Rate -0.53 -10.95 -3.26 25.13 -8.44 6.57 19.83 53.25 89.12 13.16 9.58 69.6 Total Expenditure Amount 12214.14 12455.11 12220.39 15704.72 17427.32 18047.62 19471.30 22076.53 27259.38 30903.14 34068.44 39789.84 Annual Growth Rate 23.63 1.97 -1.88 26.47 4.40 3.56 7.89 13.38 23.48 13.37 10.24 16.79 Capital expenditure as % to total expenditure 5.31 4.63 4.57 4.52 3.96 3.78 4.19 5.67 8.69 8.67 8.62 12.51

Source: Finance Department, Govt. of Kerala,2011

Non-Plan Expenditure - Interest, Pension and Salary

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2.26 During 2009-10, the commitments on the following three major items coming under nonplan/non-developmental expenditure viz. interest, pension and salary accounted for about 75.83 per cent of the total revenue receipt of the state whereas it was 75.11 per cent in 2008-09. The rate of growth of interest expenditure during 2009-10 over the previous year was 13.58 percent. commitment as salary during the period went up by 8.12 percent. As against 2008-09, pension commitment during 2009-10 went up by `19.07 crore registering a decline in growth rate by 0.41 percent. The total commitment on interest, pension and salary which was 75.11 per cent of the revenue receipts and 65.23 per cent of revenue expenditure in 2008-09 reached at a level of 75.83 per cent of revenue receipts and 63.59 per cent of revenue expenditure in 2009-10. (Appendix 2.3).

Debt Profile
2.27 The debt profile of the state for the period from 1999-00 to 2010-11 (BE) is given in Table 2-13.The Debt/GSDP ratio shows the extent to which a state economy represented by its GSDP can sustain its debt. Even though the bench marks in this case is less than 30 percent, the debt liabilities of the state which was as high as 35.11% of GSDP during 2004-05 declined continuously to 30.81 % during 2009-10. Debt liabilities of the state include borrowings on account of internal debt, treasury savings and provident fund and loans and advances from Government of India. The debt of the state increased from ` 20176.10 crore in 1999-2000 to ` 70969 crore, in 2009-10 . Out of `70969 crore `43368 crore represent internal debt; ` 21296 crore as small saving, provident fund etc. and remaining ` 6305 crore represents Loans and advances, from Central Govt. Table - 2.13 Debt of the State
Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 BE AAGR from 1999-00 to 2010-11 Internal Debt 5735.61 7627.34 9342.46 11747.02 17420.94 21676.23 25670.72 29969.15 34019.00 38814.00 43368.00 50816.00 Growth rate 29.64 32.98 22.49 25.74 48.30 24.43 18.43 16.74 13.51 14.10 11.73 17.17 22.94 Small Savings Provident Fund, Others 8537.67 10189.75 11261.65 12778.37 14403.33 14790.83 14840.93 14534.26 15858.00 18447.00 21296.00 19821.00 Growth rate 51.71 19.35 10.52 13.47 12.72 2.69 0.34 -2.07 9.10 16.33 15.44 -6.93 11.89 Loans and Advances from the Central Govt. 5902.79 6101.88 6346.46 6534.88 5627.96 5410.82 5417.40 5371.77 5533.00 6009.00 6305.00 7692.00 Growt h rate 4.51 3.37 4.01 2.97 -13.88 -3.86 0.12 -0.84 3.00 8.60 4.93 22 2.91 Total 20176.10 23918.97 26950.57 31060.27 37452.23 41877.88 45929.05 49875.18 55410.00 63270.00 70969.00 78329.00

(` crore)
Growth rate 28.51 18.55 12.67 15.25 20.58 11.82 9.67 8.59 11.10 14.19 12.17 10.37 14.46

Source : Finance Department, Govt. of Kerala

2.28 .The growth rate of debt outstanding declined from 14.19% in 2008-09 to 12.17% in 2009-10. Though the average rate of interest increased slightly from 7.85% in 2008-09 to 7.89% in 2009-10, it remained well behind the rates of previous years that varied between 8% and 10%. The debt burden of the state government is a serious concern. In the past, a significant component of the debt burden went towards the financing of state plans, in recent times a substantial portion has to be used to bridge the gap between non-plan revenue receipts and expenditure.

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2.29 The Balance from Current Revenue (BCR) becomes negative on account of higher rate of growth on non-plan revenue expenditure over the rate of growth of revenue receipts and the plan size getting increased every year results in higher borrowing for financing the plan.Internal debt continued to grow faster with an annual average growth rate of 22.94 percent during the period 1999-00 to 2010-11. 2.30 A comparison of debt / GSDP ratio as well as percapita debt liability of Kerala with neighboring states is shown in Table 2.14. The per capita debt of Kerala which was `11478 in 2004 increased to `16074 in 2008. The percapita debt of neighbouring states in 2008 next to Kerala was Andhra Pradesh `9991) followed by Tamil Nadu (`9692) and Karnataka (`8901). The debt GSDP ratio of Kerala and Andhra Pradesh were 34% and 25% respectively during 2008. 2.31 The gross retention (receipt minus disbursement) and net retention (gross retention minus interest) which were `7860.12 crore and `3199.92 crore respectively in 2008-09 decreased to `7699.75 crore and ` 20407.84 crore in 2009-10. The details of debt profile of the state is given in Appendix 2.4. Table 2.14 Debt Position: Comparison with Other States
State Andhra Pradesh Karnataka Kerala Tamil Nadu All States Debt/GSDP Ratio(%)
2004 2005 2006 2007 2008 2004

Per Capita Debt (`)

2005 2006 2007 2008

31 28 39 26 32

39 27 38 25 32

39 26 37 24 32

36 24 35 22 29

25 22 34 21 27

7565 6617 11478 7155 7525

10167 7427 12503 7705 8282

11437 8329 13588 8742 9238

11912 8590 14629 9094 9754

9991 8901 16074 9692 10018

Source: Budget in Brief, Govt. of Kerala 2009-10

Contingent Liabilities 2.32 Contingent liabilities also become the debt obligations of the state in the event of default by borrowing public sector units for which Government is a guarantor. Over a decade, liability on account of guarantee increased. But from a peak of `14009.19 crore in 2003-04, the outstanding liability on Government Guarantees declined to `7495 crore in 2009-10. The outstanding guarantees of the State Government from 1999-2000 to 2009-10 are shown in Table 2.15. Table - 2.15 Outstanding Guarantees (` crore)
Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Maximum Amount Guaranteed 11431.59 12797.80 14222.46 14922.61 15612.67 14783.36 13751.80 12646.70 14871.08 11385.54 10225.78 Amount Outstanding 7952.24 9553.17 11817.53 12623.38 14009.19 12315.96 11934.69 9405.33 8317.34 7603.32 7495.00

Source : Finance Department, Govt. of Kerala, 2011

Economic Review 2010