The State Of State Finances
Somewhere, deep within the many books of accounts that are with Government (Ministry of Finance / Planning Commission) lays a unified view of the finances of the each of the 28 states and 7 Union Territories (administered by the centre). Unfortunately, much as we are challenged, deep dives are not simple.
While IndiaSpend’s charter is to focus on federal spending to start with, we are increasingly coming around to the view that highlighting state level finances and expenditure might be useful, particularly to those. So we picked Maharashtra, until recently considered India’s most industrialised and economically progressive state. We also felt it was best to stick to India’s federal auditor the Comptroller & Auditor General’s (CAG) reports for 2009-10.
The Missing Aggregate
As a next step, we looked at the lesser known (compared to the IOC, BPCL, NTPC et al), 'state’ owned public sector units. Mostly because they are unlisted they stay out of analyst view. But structured as they are, they stay out of public view too. Unless they are the power, transport and infrastructure utilities in which case they are in the public eye. But that scrutiny does not extend to their balance sheets. And their cumulative condition has a direct bearing on the combined national deficit and of course a drain on the exchequer.
So let’s look at how Maharashtra’s 85 state PSUs are doing. Their combined revenue was Rs 40,873 crore (approximately $9 billion) and they represented just under 5% of the state’s GDP. Some 199,000 people worked in these enterprises which turned in a cumulative loss of Rs 1,360 crore ($302 million). Accumulated losses are pegged at Rs 8,539 crore ($1.9 bn). Interestingly, of these 85 State PSUs, 23 are classified as non-working and 3 have been under liquidation for between 17 and 24 years!
Records Don’t Tally
And if you thought with the winds of change sweeping the country, the larger attempt was to cut back on government investments in running businesses, not quite. Between 2006 to 10, the Maharashtra Government actually launched 5 new state PSUs. Moreover, as the CAG’s report points, these 5 were established without a 'Government Resolution’ from the Finance Department. Interesting.
We talked of the lack of a unified view on a state’s balance sheet. Here’s why. The CAG’s report says the records of the state PSUs and the state government do not tally. Here’s an insight into the equity, loans and guarantees rundown.
And this was not something that sprung up in March 2010. Rather, figures were not reconciled for as long as three years, says the Auditor. Imagine that happening in a publicly listed company. Incidentally, the profitable companies were Maharashtra State Electricity Transmission Company (Rs 368 crore), Maharashtra State Road Transport Company (Rs 118 crore) and Maharashtra State Power Generation Company (Rs 73 crore).
Time For Scrutiny
Accounts finalisation seems to be a major effort in the state of Maharashtra and presumably other states too. Of the 62 working state PSUs, 56 had arrears in accounts ranging from 1 to 13 years! Moreover there were some 178 types of accounts in arrears in contrast to 71 that were finalised. Ten of these PSU did not finalise a single account in 2009-10 thus racheting up the average, says the CAG.
There are two points here. First, while some profitable state PSUs owe their profit status to monopoly positions, this is a good time to expand public scrutiny and thus participation by listing them on the bourses. Possibly by embarking on a phased disinvestment. This would help them grow while making them accountable. The CAG itself blames most of the losses on poor management and calls for more professionalism and accountability in management.
On the other hand, it’s time we moved faster to shut down chronically loss making state-run organisations. Second, we need to force a clear, 'unified' approach to preparing state government accounts and balance sheets that help citizens understand what's really going on. As they say, you can't fix what you can't see.