Meghalaya Public Finance And Fiscal Policy

The state of Meghalaya, along with all the other states in the NER, has been given special category status by the central government. Special category status is accorded to a state with certain characteristics that necessitate stronger than normal hand-holding by the central government. The predominant characteristics relate to geographic terrain, specifically hilly or mountainous tracts.

GSDP OF MEGHALAYA:

The Gross State Domestic Product (GSDP) is likely to underestimate income in Meghalaya, which is characterised by subsistence agriculture and a significant dependence of people on community forests for meeting various needs.The real GSDP of Meghalaya grew at a trend rate of 5.93 per cent per annum between 1999–2000 and 2007–08 (at 1999–2000 prices). The population of Meghalaya during the same period grew at a trend rate of 1.39 per cent per annum. Real per capita GSDP of Meghalaya thus grew at 4.48 per cent per annum during that period.

Low population density accords certain natural advantages from (potentially) larger availability of terrestrial resources, but several disadvantages from the point of view of ensuring reach of public services to a sparse population. For example, Meghalaya reports a lower literacy rate and a higher poverty ratio than that of the NER as a whole. Trend growth rate of aggregate GSDP for Meghalaya and NEREAM(the north-east region excluding Assam and Meghalaya)  stood, respectively, at 5.99 and 7.35 per cent per annumbetween the years 1999– 2000 and 2005–06.Meghalaya thus has a significant head start (as compared to NEREAM) in its effort to catch up with the average all India per capita GDP.

Growth component over period 2000- 2006:-

• There has been some decline in the share of agriculture and allied sectors, as also in the service sectors.
• In 1999–2000, the mining and quarrying sector contributed almost two-fifths of industry GSDP in Meghalaya, but the share has gradually declined to about onethird in 2005–06.

INVESTMENT FOR ACCELERATING GROWTH:-

Improving the standard of living of the people would require sustained increases in per capita income levels. Given the current levels of income, this will require a significant acceleration in growth rate. If by 2030 the people of Meghalaya are to achieve living standards comparable to the rest of India, their per capita GSDP would need to grow at an average rate of 11.5 per cent.

The North Eastern Region: Vision 2020, an illustrative scheme for accelerating the growth process of Meghalaya shows:-

Average Annual Growth Rate (%) till 2029-30:–

Required GSDP CAGR (%)–9.92

Projected Population CAGR (%)–1.04

Implied Per Capita GSDP Growth (%)–8.88

Projection of Investment Requirements to Achieve Economic Target by 2030:-

Required CAGR (%) of GSDP:-

2012-13 to 2016-17 = 9.45

2017-18 to 2021-22  =10.25

2022-23 to 2026-27 = 10.25

2026-27 to 2029-30  =10.25

Required Investment to Achieve Growth Target In Crores, 2009-10 Prices:-

2012-13 to 2016-17  =28937

2017-18 to 2021-22  =50097

2022-23 to 2026-27  =81603

2026-27 to 2029-30  =71882

Required Investment as Percentage of GSDP:-

2012-13 to 2016-17  = 34.8

2017-18 to 2021-22  =37.2

2022-23 to 2026-27  = 37.2

2026-27 to 2029-30  =37.2

Meghalaya requires a massive investment as well as significant increase in productivity if it desires to achieve a standard of living somewhere near that of the rest of India by 2030. Investment requirements may be met from savings and borrowings, both government and private.

In the case of the government, capital expenditure is of the nature of investments and may be financed from current revenues (tax and non-tax), but only if there is revenue surplus (zero revenue deficits). In the eight year period, from 2000–01 to 2007–08, Meghalaya was revenue surplus in six years (all but 2001–02 and 2004–05). However, the revenue surplus is barely 2 per cent of GSDP and can at best cover only a small fraction of the additional investment requirements. Even with optimistic assumptions on the ICOR(increment capital output ratio), the (desirable) investment rate averages about 37 per cent of GSDP. Thus other feasible avenues of resources have to be rigorously explored.

A possible source of investment lies in additional government borrowing, which adds to government public debt either through public accounts or other internal and external borrowings. This in turn results in an increase in the fiscal deficit in government accounts. Between 2000–01 and 2007–08, the fiscal deficit for Meghalaya has varied between 1.1 per cent and 6.3 per cent of GSDP (with an average of 3.8 per cent) In years of revenue surplus, the full measure of fiscal deficits may, arguably, be assumed to finance capital expenditures or new investments. Thus, revenue surplus and budgetary borrowing together allow for (on an average) about 5 per cent of GSDP as new investment or capital expenditure. In fact, capital expenditure as derived from budgets averaged less than 4.5 per cent of GSDP between 2000–01 and 2007–08.

It appears that less than 15 per cent of investment needs are being met from public sources. The remainder of investment has to come from the private sector. In many cases, this can be facilitated through public-private partnerships.

GROWTH OF REVENUE AND EXPENDITURE:-

Between 2000–01 and 2007–08, total revenues for Meghalaya show the lowest rate of 12.13% growth as compared to15.71%  the NER or NEREAM . Growth rates of total revenues reflect a similar picture even for a longer period between 1987–88 and 2007–08(11.47% for Meghalaya and 12.24% for NER) . Further, for the period between 2000–01 and 2007–08, the rate of growth of each category of revenue (tax, non-tax, grants-in-aid, and contributions) in Meghalaya trails the rate of growth of the respective components for NEREAM.

The tax-GSDP ratio of Meghalaya increased from 7.14 per cent in 2000–01 to 11.61 per cent in 2007–08. Similarly, the tax-GSDP ratio for NEREAM has also increased from 6.54 per cent in 2000–01 to 11.24 per cent in 2007–08. Thus, despite the higher growth rate of GSDP and buoyancy in taxes, the tax-GSDP ratio for NEREAM is lower than for Meghalaya. But it is also apparent that in the last decade or so, NEREAM has been gradually catching up with Meghalaya, which is possibly losing its pre-eminent position in the NER. Alternatively, one may interpret this as an improvement in balanced development of the NER.Thus, capital expenditure in Meghalaya is critically straining existing infrastructure, with consequent social and economic costs in terms of growth and employment. This feeds back into revenue mobilisation performance as observed with a deceleration in tax revenues for Meghalaya. An urgent redressal of this situation appears to be desirable.

STRUCTURE OF REVENUE AND EXPENDITURE:-

• The differences in growth rates of the components of revenue and expenditure have resulted in significantly altering their structure in the last decade. Thus, the share of grantsin-aid and contributions, which constituted more than two-thirds of revenues for Meghalaya in 2000–01, has declined to about 56 per cent in 2007–08.
• For Meghalaya the share of tax revenues (in total revenues) increased from about one-quarter in 2000–01 to more than one-third in 2007–08. The share of non-tax revenues has shown some increase over the period, but remains less than 10 per cent.
• In Meghalaya, the share of revenue expenditure in total expenditure increased by about 3 percentage points, with an equivalent reduction in the share of capital expenditure.
• Segregating tax revenues into own-tax revenues and share in central taxes shows that between 2000–01 and 2007– 08, for Meghalaya, there is some decline in the proportion of own-taxes.
• In contrast to the revenue expenditure scenario, non-developmental capital expenditure entails only a small proportion that was less than 5 per cent of total capital expenditure in 2000–01. This proportion appears to be rising but remained less than 10 per cent in 2007–08. The remainder (above 90 per cent) is being incurred as developmental capital expenditure.
• Almost 60 per cent of developmental revenue expenditure in Meghalaya was incurred on social services in 2000–01. But this proportion has been declining and is close to one-half in 2007–08.
• Developmental revenue expenditure on economic services has increased in Meghalaya.

Differences in the growth rates of components of revenue and expenditure have affected their structures. In turn, this has affected the structure of deficits. From the beginning of the last decade, revenue deficits showed a decline, and for the NER states as a whole, revenue deficits were quickly transformed into surplus that has been rising. This reversal of deficits to surplus also has to do with the promulgation of fiscal responsibility and budget management (FRBM) acts, duly incentivised by the recommendations of the Twelfth Finance Commission. Unfortunately, the effort appears more to satisfy accounting prudence than to influence expenditure efficiency and effectiveness that improves outcomes. Among several causes impacting GSDP of a state and its consequent resource mobilisation capacity, issues in extant governance in the state play a critical role. The present polity of the state of Meghalaya does not present itself as a coherent, synchronised, and harmonious institution. In particular, this impacts not only the direction of public expenditure, but more so its effectiveness. Analogously, it presents difficulties in exercising tax or revenue efforts, with consequent influence on scope, level, and coverage of public services.

OUTLOOK OF MEGHALAYA ECONOMY IN RECENT PAST AND FUTURTE ASPECT OF GOVERNMENT INVESTMENT:-

The GSDP at current market prices for the year 2013-14, 2014-15, 2015-16 and 2016-17 was estimated at  22,938.24 crore, 24,408.07 crore,  26,745.23 crore and  29,566.90 crore respectively, registering an annual percentage growth of 6.41 percent, 9.58 percent and 10.55 percent respectively. At constant (2011-12) prices, the GSDP of the state during the same period was estimated at 20,725.71 crore, 21,151.83 crore,  22,507.01crore and ` 24,004.75 crore with corresponding annual growth of 2.06 percent, 6.41 percent and 6.65 percent.

The share of Primary Sector (Agriculture, Livestock, Forestry, Fishery and Mining & Quarrying) at current market prices accounted for 23.25 percent, 18.48 percent, 18.24 percent and 17.74 percent during the year 2013-14, 2014-15, 2015-16 and 2016-17. During the same period, its share of GSDP at constant (2011-12) prices were 23.77 percent, 19.28 percent, 19.02 percent, 18.61 percent.

The Secondary Sector contributed 24.38 percent in 2013-14, 26.14 percent in 2014-15, 26.36 percent in 2015-16 and 26.08 percent in 2016-17 to the GSDP at current market prices. At constant (2011-12) prices, its contribution were 25.79 percent, 26.99 percent, 26.74 percent and 26.31 percent during the same period.

The Service/Tertiary Sector being the major contributor towards the economy of the state contributed 47.60 percent in 2013-14, 49.19 percent in 2014-15, 48.93 percent in 2015-16 and 49.54 percent in 2016-17 to the GSDP at current market prices. At constant (2011-12) market prices, its contribution during the same period were 45.91 percent, 47.83 percent, 48.29 percent and 49.11 percent respectively.

The Per Capita GSDP at current market prices stood at  73,168/-,  75,228/-,  81,765/- and  88,497/- during 2013-14, 2014-15, 2015- 16 and 2016-17 showing an annual increase of 4.18 percent, 7.26 percent and 8.23 percent. The estimates of per capita GSDP at constant (2011-12) prices were  66,111/-,  66,058/-,  68,808/- and  71,849/- with the corresponding annual growth of -0.08 percent, 4.16 percent and 4.42 percent.

Overview of the State Government Finances:

During 2015-16, the Revenue Surplus increased to  695.40 crore as compared to  176.42 crore during 2014-15 on account of increase in Revenue Receipts brought about mainly by higher revenue realization from the State’s Own Tax Revenue and increase in the State’s Share of Central Taxes against a marginal increase of 1.53 percent in Revenue Expenditure.

The Revenue Surplus is estimated to reduce to  386.90crore during 2016-17 (RE) on account of higher estimated revenue expenditure. The lower Revenue Surplus during 2014-15 has also affected the Fiscal Deficit during the year, increasing the fiscal deficit to  978.44crore as compared to  382.18 crore during 2013-14. The Fiscal Deficit reduce to  554.76crore during 2015-16 (Actual) due to estimated higher devolution of Central Taxes. The Fiscal Deficit during 2016-17 is estimated to increase to  1089.75crore on account of higher revenue expenditure.

The Primary Deficit of  572.84crore during 2014-15 reduced to  88.88 crore during 2015-16 (Actual). The same is, however, estimated to increase to  538.46crore during 2016-17.

• The Revenue Surplus during 2015-16 is higher than that of 2014-15 on account of higher than proportionate increase in revenue receipt as compared to expenditure. The revenue surplus is estimated to reduce during 2016-17 as the revenue receipts is estimated to increase by 28 percent over 2015-16, whereas the revenue expenditure is estimated to increase by 35 percent.
• With regard to deficit indicators, the fiscal policy of Government continues to be guided by the principle of gradual adjustment. The performance in respect of revenue surplus during the ensuing year and the rolling targets are in line with the revised roadmap of fiscal consolidation, as amended in 2015 and significant improvement is expected over the medium-term. The fiscal deficit will breach the statutory limit of 3 per cent of GSDP during the ensuing fiscal 2017-18 and rolling targets for the next two years. However, efforts to contain the fiscal deficit to within feasible limits will be initiated through revenue and expenditure management measures.
• As per the Statement, the fiscal deficit of the State during 2014-15 was 4.01 percent of GSDP due to the fall in the State’s Own Revenue. However, the fiscal deficit greatly improved during 2015-16 to 2.07 percent of GSDP with the increase in State’s Share of Central Taxes in view of the recommendation of the Fourteenth Finance Commission. However, the Fiscal Deficit is estimated at 3.69 percent during 2016-17 as a result of lower estimated receipt from Share of Central Taxes and Grants as well as State’s Own Tax Revenue. The fiscal deficit is estimated at 3.80 percent of GSDP during 2017-18 on account of anticipated higher revenue expenditure.
• The total liabilities as a percentage of GSDP from 2014-15 to 2017-18 (BE) are above the limit of 25 percent recommended by the Fourteenth Finance Commission. However, the ratio is sought to be reduced during the two year projections.

Fiscal Outlook for 2018-19 and 2019-20:-

The parameters of the Government’s medium term fiscal projections are the FRBM limits and the budget estimates. These are, however, subject to fluctuations depending on the state of the economy and central transfers, which directly affect the fiscal performance of the State. As explained earlier the fiscal deficit target of 3 per cent of GDP was mandated to be maintained throughout the award period of the Fourteenth Finance Commission (2015 – 2020), as per amended FRBM Act. The FD for 2018-19 and 2019-20 has therefore been assumed at 3.45 and 3.06 per cent of GSDP respectively.

1. Receipts:

(a) Revenue Receipts:

The State’s Own Tax and Non Tax Revenue has increased from  1,282.51crore in 2014-15 to 1,285.41 crore in 2015-16 and is estimated to further increase to  1,734.71 crore in 2016-17 and  2,071.75 crore in BE 2017-18.

The State’s Share of Central Taxes has increased from  1,381.69crore in 2014-15 to  3,276.46 crore in 2015-16. The same is estimated to increase further to  3,668.82 crore during 2016-17 and  4,339.22 crore during 2017-18 as the Fourteenth Finance Commission has recommended an increased share of tax devolution to from 32 per cent to 42 per cent of the divisible pool, and a higher ratio recommended for the State out of the sharable taxes.

Other Central transfers such as grants for Central Sector and Centrally Sponsored Schemes, NEC, NLCPR and EAPs, etc. reduced from  3,764.08 crore in 2014-15 to  2,481.25 crore in 2015-16. This is, however, estimated to increase to  3,577.32crore in 2016-17 and  4,868.83 crore BE 2017-18. Consequent to the recommendations of the Fourteenth Finance Commission, the Centre has stop releasing grants to the State for financing its plan schemes and the State is required to meet such requirements out of the fiscal space provided by the higher tax devolution from the fiscal 2015-16.

2. 2. Expenditure:

The total expenditure of  7,426.46crore in 2014-15 increased to  7,616.96 crore in 2015-16. The estimated expenditure of  10,103.19 crore in 2016-17 has been increased during the course of the year through additional allocations made by way of supplementary demands for grants, thereby enhancing its expenditure allocations over the budget estimates. Efforts are being made to maintain the fiscal deficit targets for the year through continuation of the extant economy measures, budgetary cut and restrictions on Non Plan expenditure. The total expenditure for 2017-18 is estimated at  12,537.81crore.

(a). Revenue Expenditure: the expenditure has increased marginally by 1.53 percent from 6,251.86 crore in 2014-15 to 16,347.72 crore in 2015-16. The revenue expenditure is estimated to increase to  8,593.95crore in 2016-17 and further to 110,647.63 crore in BE 2017-18. The major components of the revenue expenditure of the Government include Interest Payments, Maintenance expenditure, Subsidies, Salaries and Pensions.

Consequent to the merger of Plan and Non-Plan classification of expenditure by the Government of India from the fiscal 2017- 18, the State Government has also made a similar shift from the Budget of 2017-18.

Fiscal Policy for the ensuing financial year:

The fiscal policy for 2017-18 will continue to be guided by the objectives of the FRBM Act, that is to generate revenue surplus and reduce fiscal deficit and build up adequate surplus for discharging the liabilities and for developmental expenditures; (b) pursue policies to raise non tax revenue with due emphasis on cost recovery and equity; (c) prioritize capital expenditure and to pursue an expenditure policy that would provide impetus for economic growth with social equity and improvement in poverty reduction and human welfare.

• Tax Policy:The collection out of the State’s Own tax and Non Tax Revenue during the 3rd quarter of 2016-17 was about 93 percent of the Budget Estimates for the quarter. Continuing with its efforts of revenue augmentation, the State will endeavour to improve its revenue collection in 2017-18 through periodic review, identification and introduction of new revenue collection measures.
• Expenditure Policy: Expenditure will be focused on economic growth with social equity and improvement in poverty reduction and human welfare, the Government will continue with its policy of providing adequate resources for sectors such as education, health & family welfare, agriculture & allied activities, rural development and transport infrastructure apart from making adequate provision for meeting committed liabilities such as salaries, pension, interest payment and repayment of loans and advances.

The Fifth Meghalaya Pay Commission constituted by the Government to examine the existing structure of emoluments, etc is expected to submit its report by mid-term 2017-18, it is anticipated that the recommendation of the Pay Commission will cause additional financial implication for the State Government.

• Borrowings:In 2015-16 the market borrowings of the State was This is estimated to increase to 948.30crore in 2016-17 and  1,025.00 crore during 2017-18. Other sources of borrowings constitute loans from financial institutions, Central Government loans for EAPs and Public Account.
• Consolidated Sinking Fund: During 1999-2000 the Government constituted a “Consolidated Sinking Fund” for redemption and amortization of open market loan. In 2015-16 the Government has appropriated an amount of 38crore from revenue and credited to the Fund for investment in the Government of India Securities. The outstanding as at the end of 2016-17 is estimated at about 383.56crore.
• Contingent and other Liabilities: Though at present there is no statutory limit as to the outstanding amount of contingent liabilities, the State is committed to restricting the issue of guarantees, except on selective basis where the viability of the scheme to be guaranteed is assured and the scheme is beneficial to the State. To service contingent liabilities arising out of the invocation of State Government Guarantees, the Government has constituted the Meghalaya Guarantee Redemption Fund managed by the Reserve Bank of India. During 2015-16 an amount of 74crore was transferred to the fund account.

The State has, amongst other things, great economic prospect in tourism and agriculture and allied sectors. However, the comparative advantage in these sectors can be leveraged, provided necessary logistics in terms of economic infrastructure like road connectivity, scheme-convergence, capacity building, financial assistance to prospective entrepreneurs etc,  which require substantial investment, both for creating assets and maintenance of existing ones, are in place. This requires the State Government to earmark adequate financial resources over and above normal government expenditures for State intervention in these crucial sectors through State development schemes.

Thus state of Meghalaya is on its right path to fiscal prudence and FRBM limit without compromising growth potential and business environment. State is also a role model for other states in terms of environment protection.