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Can Gujarat Invest Ahead For Its Citizens? A Fiscal Study

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* Modi Government is likely to report revenue surplus of Rs 3,615 crore in 2012-13

* Measures being announced to increase the government’s tax revenues

* High debt level a serious concern; just above West Bengal in debt-to-total revenue receipt ratio


Gujarat has managed to register good growth in industry and agriculture, even though, as we argued in a previous article, the agriculture sector has not been as consistent.


IndiaSpend’s Dhritiman Gupta now looks at the general financial health of the state government to understand the cost of the progress reported so far, ahead of the assembly elections next month.


Let us first look at the finances of the state government.


Table 1: Revenue And Fiscal Deficits


Revenue deficit (-) or surplus (+) Fiscal deficit (-) or surplus(+)
2002-03 -3,564 -6,028
2003-04 -3,706 -9,143
2004-05 -4,036 -8,690
2005-06 -398 -6,269
2006-07 +1,770 -5,648
2007-08 +2,150 -4,770
2008-09 -65 -10,437
2009-10 -6,965 -15,153
2010-11 -5,076 -15,073
2011-12 +1,920 NA

(Figures in Rs. crore; Source: Gujarat Socio-Economic Review 2011-12)


The revenue account involves general spending like payments of salaries, pension and interest. The receipt side includes tax and non-tax revenue. A high revenue deficit in general could be considered unhealthy as finances meant for productive investments, such as building infrastructure, have to be re-directed to meet the deficit.


As we can see from (Table 1), in 2002-03, the revenue deficit was very high at Rs 3,564 crore. The years 2006-07 and 2007-08 were a golden period of sorts – reporting revenue surpluses to the extent of Rs 1,770 crore and Rs 2,150 crore, respectively.


Matters worsened later due to the effects of the global slowdown, which required higher government expenditure to boost the economy. In 2010-11, the revenue deficit stood at Rs 5,076 crore.


The good news is that the state recorded a revenue surplus of Rs 1,920 crore in 2011-12 (as per the revised estimates of the government). And the surplus is expected to go up to Rs 3,615 crore in 2012-13, according to the Budget Estimates.


Analysing Fiscal Indicators


The fiscal deficit is a combination of revenue and capital deficits. As expected, the fiscal deficit also went haywire after 2008-09.  In 2010-11, the fiscal deficit stood at Rs 15,073 crore.


Given this broad overview of the finances, we can move on to look at some fiscal indicators.


Table 2: Fiscal Indicators


RD/GSDP (%) FD/GSDP (%) Debt/GSDP(%)
2002-03 -2.5 -4.2 38.9
2003-04 -2.2 -5.4 37.0
2004-05 -2.1 -4.6 37.7
2005-06 -0.1 -2.7 36.5
2006-07 0.6 -2.1 34.6
2007-08 0.7 -1.5 33.0
2008-09 0 -3.1 32.2
2009-10 -1.6 -3.2 31.7
2010-11 -1.0 -2.9 NA

RD – Revenue Deficit (-)/Surplus (+), Fiscal Deficit, GSDP-Gross State Domestic Product ; Data for the last row is taken from Gujarat Budget 2012-13.

(Source: Planning Commission Data)


As can be seen, the figures in (Table 2) mirror (Table 1). The RD/GSDP ratio is a simple indicator of the size of overspending (on factors like salaries, interest payments etc) relative to the total income of the economy. The RD/GSDP ratio was controlled well post 2002-03 but things went wrong post 2007-08. Recovery kicked in after 2011-12.


The FD/GSDP ratio was also controlled till 2007-08 when it reached 1.5%. Since then, the figure has shot up to over 3% and stayed over that mark till 2009-10. In 2010-11, it was brought marginally below 3% and stood at 2.9%.The Debt/GSDP ratio, however, has shown a steady decline from 38.9% in 2002-03 to 31.7% in 2009-10.


Let us step back for a moment. In 2009-10, of the states for which data is available, 14 had revenue deficits and Gujarat was one of them. Only states like Kerala, West Bengal, Punjab and Haryana had worse figures.


In 2009-10, Gujarat was ranked 9th on the Debt/GSDP ratio with a figure of 31.7% but a Debt/GSDP ratio of over 30% is not a comfortable number. Higher Debt/GSDP ratio implies larger liabilities in terms of debt servicing.


The best performer was Haryana with a Debt/GSDP ratio of 19.2%. The worst were states like West Bengal and Uttar Pradesh with ratios of 43.3% and 45%, respectively.


Tax Indicators


We will now look at some other financial indicators relating to tax collections and underline its implications. Better tax collections will lead to higher revenue and provide freedom with respect to revenue management.


Table 3: Tax Indicators


OTR/GSDP (%) TRR/GSDP (%) Debt/TRR (%)
2002-03 6.7 12.6 308.6
2003-04 6.6 10.8 341.4
2004-05 6.8 10.7 352.0
2005-06 6.9 12.5 291.9
2006-07 7.0 12.8 293.3
2007-08 7.2 11.7 281.1
2008-09 6.9 11.4 281.1
2009-10 6.7 11.0 288.7

OTR- Own Tax Revenue, TRR-Total Revenue Receipt, GSDP-Gross State Domestic Product.  Data for 2010-11 was unavailable in the data source used.

(Source: Planning Commission Data)



Own Tax Revenue (OTR) is the tax revenue generated by the state government.  As can be seen from (Table 3), Own Tax Revenue/GSDP ratio has hovered between 6% and 7% and the highest was in 2007-08 at 7.2%.  Post 2007-08, the ratio has fallen below 7%, hitting a low of 6.7% in 2009-10.
In 2009-10, the OTR/GSDP ratio was 9.8% for Andhra Pradesh, 10.1% for Tamil Nadu and 10.9% for Karnataka. Out of 28 states, Gujarat was right in the middle – ranked 14th – in 2009-10.


Let us now look at Total Revenue Receipt/GSDP, and we reach a similar conclusion. Besides own tax revenues, total revenue receipt includes non-tax revenues, share in central taxes and grants from the central government.


The TRR/GSDP ratio has hovered between 11% and 13%. A high of 12.8% was reached in 2006-07.  In 2009-10, the figure was 11.0%. In the same year, the ratio was 19.2% for Andhra Pradesh, 15.3 % for Tamil Nadu and 16.2 % for Karnataka. Out of 28 states, Gujarat was ranked 25th on this ratio.


The Debt/TRR ratio gives us a measure of debt servicing capability of the state.  Higher the ratio, larger is the amount required to service the debt, leaving lesser funds for other expenditure. The Debt/TRR ratio of Gujarat has remained close to 300% in all the years. In 2009-10, the ratio was 288.7%.  It was worse than all states except West Bengal that had a ratio of 398.6%.


So, many financial concerns of the Modi government (like high revenue deficit and fiscal deficit) can be addressed with tax reforms that can push up the Own Tax Revenue/GSDP ratio. This happened in Budget 2011-12 when value added tax (VAT) was increased on tobacco products and mobile phones. This led to a revenue surplus of Rs 1,920 crore.
The Modi government has provided many tax reliefs in Budget 2012-13 (Read India Spend’s report here) too. Despite these reliefs, the state government expects revenue surplus to go up to Rs 3,615 crore.


While basic infrastructure issues like water and electricity are likely to play out more than the state’s finances in the forthcoming elections, the numbers are useful to understand a state’s (in this case Gujarat) capability in investing ahead for its citizens.

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