Can Haryana Break Away From The Bengal, Kerala Club?

The state of Haryana has been clubbed with Bengal, Kerala and Punjab for the state of its finances, particularly for its large revenue deficit or a ‘negative’ gap between tax and non-tax collections and its expenditure. But Haryana is getting a better grip on its finances, finds IndiaSpend’s Dhritiman Gupta.

The good news is that Haryana is doing a better job of its deficits - they went haywire after 2008 as Table 3 below will demonstrate. The bad news is that recovery is still far as the state will struggle to find money to fund large infrastructure and development projects. Bottom-line, if you are a Gurgaon resident, life may not get better that soon!

Haryana’s Budget document 2012-13 (BE) is a good place to start. According to the document, 46% of revenues will be free for developmental purposes. Let’s look at where this free revenue and capital will be allocated.

Haryana Plans 5 Years Ahead

The first thing to note is that the Budget (Table 1) compares only this and last year. However, Haryana has planned for the next 5 years and allocated accordingly this year. Hence it does not mean that departments whose allocations have been reduced this year will continue to be denied such.

Let’s take Social Justice and Empowerment. Even though allocations were reduced from Rs 1, 698 crore in 2011-12 to Rs 1,684 crore in 2012-13, this department got a huge hike over the next five years, compared to the previous five. Over 2007-12, the allocation to this department was at Rs 5, 891 crore. The allocation to this department over 2012-17 is slated to be Rs 12,176 crore; an increase of 106.6%. Hence yearly comparisons may not give a full picture.

However, if we do go by annual comparisons, some interesting facts emerge. Allocations to agriculture and irrigation have reduced. There is an 8% decrease in agriculture outlays and a 12% reduction in outlays in irrigation. Outlays in urban development were reduced by 12.7 % too.

Education, Sports, Arts and Culture departments received the maximum hike at 34%. Energy and transport got hikes of 17% and 18% respectively.

Table 1: Change In Haryana's Departmental Outlays From 2011-12 to 2012-13

Source: Haryana State Budget 2012-13

Performance Over Last 5 Years

Now let’s put Haryana’s Budget 2012 in the context of the state’s economic performance in the last five years. The straight takeaway is that growth has largely bettered the national average.

Except, in 2007-08 Haryana has managed to grow faster than the nation as a whole. After 2006-07, growth slipped from 11% to around 8%, on account of the global recession. Haryana recovered in 2009-10 to grow 11%, only to slip below double digit growth in 2010-11, and 2011-12. The growth rates have been on the decline since 2009-10 but it mirrors the national trend.

Table 2: Haryana's Growth Rate In Comparison To The National Trend

(Figures in %)

Source: Haryana Economic Survey 2011-12

Haryana’s finances, however, received a jolt in 2008 which it is still trying to recover from. Prior to 2008-09, Haryana had managed its finances ably, recording consistent revenue surpluses. For example, if it earned Rs 100 from tax and non-tax revenues, it ended up spending around Rs 90 including interest, salary and pension payments.

But states also borrow to invest. If investments are included in expenditure calculations, we arrive at an estimate of general fiscal health of the state. Generally, most states run a fiscal deficit and figures of fiscal deficit/GSDP of 2-3% are considered safe. In 2006-07, Haryana managed to post a fiscal surplus of 0.9% of GSDP. Since then it has been posting deficits.

Let’s take a closer look at Haryana finances.

Table 3: Haryana's Financial Details

Source: Haryana State Budget 2012-13

Going Down Hill Since 2007-08

As is obvious from the table things started to go wrong for Haryana since 2007-08, when it had a revenue surplus of 1.4% of GSDP and a fiscal deficit of only 0.8% of GSDP. By 2008-09 the tables had turned. That year the state suddenly started incurring more revenue expenditure than earnings, recording a revenue deficit of 1.1% of GSDP and a fiscal deficit of 3.6% of GSDP.

The worst year by far was 2009-10, when the revenue deficit and fiscal deficit had reached alarming proportions of 1.9% and 4.5 % of GSDP respectively.

The recovery process started in 2009-10. Since then both deficit figures have been controlled quite well. Both fiscal deficit and revenue deficit have been on the decline since then and are budgeted to be a comfortable 2.1% and 0.6% of GSDP respectively in 2012-13. Even though the recovery is not complete, the cure implemented seems to be working.

Controlled Debt-GSDP Ratio Well

Despite finances suffering since 2008-09, Haryana has controlled its debt-GSDP ratios well. From 25.3% of GSDP in 2006-07, the ratio has consistently declined to 18.4% in 2011-12. It is further slated to fall to 17.3% in 2012-13.

As far as state of finances go (revenue deficit), Haryana has been clubbed with states like West Bengal and Kerala, which have performed badly. But Haryana is improving fast whereas the two other states do not seem to be doing as well.

One reason is the way Haryana has managed debt. Thanks to which interest payments do not put as much stress on its finances as they do in the other two states. The second reason would be the amount of salary and pension commitments West Bengal and Kerala have. The corresponding numbers for Haryana are far lower.

Let’s take a closer look

Table 4: Comparison of Haryana's Debt-GSDP Ratio with West Bengal & Kerala

IP-Interest Payments, RR-Revenue Receipts, SA- Salaries, PN-Pensions

Source: Haryana State Budget 2012-13, Kerala State Budget 2012-13, West Bengal State Budget 2012-13

The debt-GSDP ratio has been very well controlled by Haryana. It declined from 19.7% in 2009-10 to 18.4% in 2011-12. The corresponding figures for West Bengal are 41.3% and 37.9%. The debt-GSDP ratio of Kerala was 27.3% in 2011-12, almost 9% higher than the figure for Haryana.

Higher debt involves higher interest payments. Bengal used to pay 36% of what it received as revenues on debt servicing in 2009-10. Even though it declined to 27% in 2011-12, it is far higher than the corresponding figure for Haryana, which is 12.9%. Kerala was closer to Haryana, with a figure of 16%

But other commitments like salaries and interest payments are far higher for Kerala than Haryana. Kerala used to pay almost 60% of its revenues as salaries and pensions in 2011-12 while Haryana paid only 40%. West Bengal took the cake with 63%.

In 2009-10, West Bengal used to pay almost 77% of its revenues as salaries and pensions. The figure for Haryana was also high at 50.6% and Kerala 55.5%.While Haryana has been successful in bringing down the ratio from 50.6% to 40.0% in 2011-12, the figure for Kerala has actually gone up to 60%. Even though West Bengal managed to reduce the figure from 77% to 63% in 2011-12, the decline remains unsatisfactory given the higher base.

All in all, in 2011-12 Haryana had 47% of its revenues free for developmental activities whereas West Bengal and Kerala had only 10% and 24.5% of revenues free for similar purposes.

The moral of the story, if anything, appears to be debt management. Despite the gains from the economic boom in the second half of the last decade, the downturn that began in 2008 affected Haryana quite badly. While returning to a higher income trajectory will take time, with better fiscal management, Haryana is well poised for stronger growth, when it comes.