Interaction with States

01 Jan 1900

In the current year, the combined GFD of States is budgeted at Rs.103, 736 crore, equivalent to 4.1 per cent of GDP compared to 4.6 per cent in 2001-02.
The combined revenue deficit as a proportion of GDP, after declining from 2.8 per cent in 1999-2000 to 2.5 per cent in 2000-01, edged up to 2.6 per cent in 2001-02 (RE) and is budgeted at 1.9 per cent for the current year.
Several States continue to have payment difficulties and have had to resort to ways and means advances (WMA) and overdraft from the RBI.
The Eleventh Finance Commission in its supplementary report had recommended a monitorable fiscal reform programme for all the States. Fifteen per cent of the revenue deficit grant, meant for 15 States during 2000-05, and a matching contribution by the Central Government were recommended to be credited into an incentive fund for distribution as grants to all the 25 (which subsequently became 28) States based on their fiscal performance. Accordingly, the Government of India has drawn up the States
Fiscal Reforms Facility 2000-01 to 2004-05, and an incentive fund of Rs.10, 607 crore has been earmarked to encourage States to implement the monitorable fiscal reform programme.
Sixteen States have drawn up the Medium Term Fiscal Reform Programme (MTFRP) in consultation with the Central Government.
The fiscal reforms cover areas such as fiscal consolidation, public sector enterprises reform, power sector reform and fiscal transparency. The Budget for the current year has carried forward this process by making a provision of Rs.12, 300 crore for reform programmes of various States. In addition, a provision of Rs.2, 500 crores has been earmarked for policy reforms in sectors constraining growth and development in different States.
The sixteen States that have finalised the MTFRP are Andhra Pradesh, Arunachal Pradesh, Himachal Pradesh, Jammu & Kashmir, Karnataka, Kerala, Maharashtra, Manipur, Mizoram, Nagaland, Orissa, Rajasthan, Sikkim, Tamil Nadu, Tripura and West Bengal. A Memorandum of Understanding has been entered into with Karnataka, Kerala (Letter of Exchange), Manipur, Maharashtra, Nagaland and Orissa.
In the current financial year up to November 11, 2002, an amount of about Rs.295 crore has been released from the incentive fund to all the States except Mizoram, as against an amount of about Rs.1, 457 crore for the entire financial year 2001-02.
A Debt Swap Scheme facilitated by the Government of India has been proposed to supplement the efforts of the States in the direction of evolving their MTFRP and reorienting their plans.
The outstanding composition of debts of State Governments indicates that loans and advances account for about 45 per cent of outstanding liabilities from the Central Government. The proposed Debt Swap Scheme is therefore focussed on liquidating the high cost debt under this category. Consensus on this matter with the States is being pursued.
The decision to implement uniform floor rates of sales tax in the entire country was discussed at the Conference of Chief Ministers of States held in November 1999. It was also decided to phase out the sales tax based incentive schemes for industries, reform the Central sales tax system, and simplify the tax system prevailing in the States by introducing a Value Added Tax (VAT). On October 18, 2002, all States and Union Territories decided to implement VAT from April 2003. An Empowered Committee of State Finance Ministers has also agreed upon the preparatory steps required for introduction of VAT in place of the sales tax. The compensation to be given to the States, in the event of a drop in tax revenue due to a changeover to VAT, is under consideration.

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