Get documents about "12fcreng00164
Document Sample
480 Twelfth Finance Commission
Chapter 4: Appendices 481
APPENDIX 4.1
(Para 4.43)
Fiscal Deficit and Debt: State Level their own revenues but also on the basis of
Sustainability Conditions transfers from the centre which, to some extent,
compensates for deficiencies in own fiscal
4.1.1 In the plan for restructuring state finances,
capacities. It is easier for the states to follow
an overall fiscal deficit target for the states of 3
interest payments to revenue receipts targets as
per cent of GDP is to be achieved by 2009-10. It
these are budgetary data whereas the GSDP data
has been suggested that the states should enact their
become available with a lag.
fiscal responsibility legislations, bringing down the
revenue deficit to zero and fiscal deficit to 4.1.4 Using the sustainability conditions, the
sustainable levels by 2008-09. While these reforms level at which the fiscal deficit to GDP ratio (f*)
are to be undertaken at the initiative of the state will be consistent with a stabilized debt-GDP ratio
governments, the Commission has also (b*) at sustainable level was derived as:
emphasized the need for imposing a hard budget
f*= p.g/ (g-i) and b*= p (1+g)/ (g-i)
constraint and suggested that the overall borrowing
programme of a state should be within a prescribed This condition can be written in terms of the
limit, determined annually, taking into account interest payments to revenue receipts ratio
borrowing from all sources. It has also been indicated by (ip) and revenue receipts to GSDP
suggested that centre may discontinue its on- ratio indicated by (r). Revenue receipts include
lending to states, subject to some exceptions where transfers from the centre. Thus,
on-lending can be managed through a public
f*= (ip)*r.g/ i and b*= (ip)*r (1+g)/ i
account, and facilitate their accessing the market
directly for their borrowing requirements. The target level of interest payments relative to
revenue receipts can be written as:
4.1.2 In this context, there is a need to ensure
that the ceiling for annual borrowing prescribed (ip)*= f*.i/r.g
for each state is (a) consistent with the fiscal deficit
Thus, the level of interest payments relative to
target for all states taken together in view of the
revenue receipts consistent with stabilizing fiscal
restructuring programme that has been drawn up
deficit and debt at sustainable levels will be
taking into account the macro considerations, (b)
that such ceilings are consistent with the (a) higher, the higher the fiscal deficit target,
sustainability requirements of each state. This note and the average nominal interest rate, and
suggests a methodology by which the aggregate
(b) lower, the higher the revenue-GSDP ratio
fiscal deficit target is translated into permissible
and the nominal growth rate.
levels of fiscal deficit for individual states. It also
identifies states where a large adjustment may be 4.1.5 Table 4.1.1 gives the levels of the ratio of
required, considering their initial positions in interest payments to revenue receipts (hereinafter,
regard to debt burden and other relevant IP-RR ratio) consistent with given levels of
parameters. sustainable fiscal deficit to GDP ratio and
alternative combinations of other parameters.
4.1.3 As discussed in Chapter 4 that the debt-
sustainability conditions can be defined in terms 4.1.6 Considering a fiscal deficit level of 3 per
of the debt-GDP ratio and equivalently in terms cent to GDP (f*=.03), interest rate at 7 per cent,
of the interest payments relative to revenue and revenue receipts to GDP ratio of about 13 per
receipts. The reference to revenue receipts is cent, achievable by 2009-10, the target level of
particularly important in the case of states, because interest payments to revenue receipts ratio for all
revenues accrue to them not only on the basis of states considered together comes out to be 13.5
482 Twelfth Finance Commission
Table 4.1.1
Target Levels of Interest Payment to Revenue Receipts Under Alternative
combinations of Parameter Values
f 0.03 r 12.0
Interest rate
Growth rate (%) 0.07 0.075 0.08 0.085 0.09 0.095
11.0 15.91 11.79 16.97 12.52 17.97 13.22
12.0 14.58 15.63 16.67 17.71 18.75 19.79
13.0 13.46 14.42 15.38 16.35 17.31 18.27
14.0 12.50 13.39 14.29 15.18 16.07 16.96
15.0 11.67 12.50 13.33 14.17 15.00 15.83
f 0.03 r 13.0
Interest rate
Growth rate (%) 0.07 0.075 0.08 0.085 0.09 0.095
11.0 14.69 11.79 15.66 12.52 16.59 13.22
12.0 13.46 14.42 15.38 16.35 17.31 18.27
13.0 12.43 13.31 14.20 15.09 15.98 16.86
14.0 11.54 12.36 13.19 14.01 14.84 15.66
15.0 10.77 11.54 12.31 13.08 13.85 14.62
f 0.03 r 14.0
Interest rate
Growth rate (%) 0.07 0.075 0.08 0.085 0.09 0.095
11.0 13.64 11.79 14.55 12.52 15.40 13.22
12.0 12.50 13.39 14.29 15.18 16.07 16.96
13.0 11.54 12.36 13.19 14.01 14.84 15.66
14.0 10.71 11.48 12.24 13.01 13.78 14.54
15.0 10.00 10.71 11.43 12.14 12.86 13.57
per cent. In Table 4.1.1, the row relating to the RRa)*(IP2/RR2)+…..+ (RRn/RRa)*(IPn/RRn)]
growth rate of 12 per cent, and revenue receipts to
If states are indexed∑ subscript j, j=∑
by 1,2,…,n,
GDP ratio of 13 per cent shows alternative levels
∑ ∑
of the IP-RR target for different levels of interest we have, IPa = IPj and RRa = RRj and
rates. Further, as shown in Table 3.13 of IPj / RRj = (IPa /RRa)
Chapter 4, which describes the fiscal profile of
combined, central, and state finances in accordance The term (IPa /RRa) indicates the IP-RR ratio for
with the suggested restructuring plan, it should be the all-state average. The fiscal deficit and debt
possible to achieve a level of interest payments to levels of individual states relative to their
revenue receipts ratio of 15 per cent by 2009-10. respective GSDP can be related to those for the
It will be useful to consider the implications for ‘average’ state, consistent with the all-state
this aggregate level of the IP-RR ratio for sustainability requirements, under certain
individual states. The all-state target [= (IP a /RR assumptions. Assuming that each state may
)] can be decomposed into targets for individual achieve the same target in regard to IP/RR, we
a
states as follows: have,
(IP a /RR a )= [(RR 1 /RR a )*(IP 1 /RR 1 )+ (RR 2 / IP1/RR1=IP2/RR2=……….=IPn/RRn= IPa/RRa
