Medium Terms Fiscal Plan for Sikkim

2011-2012 to 2013-2014

To be presented before the Sikkim Legislative Assembly as required under sub section (1) of section 3 of the Sikkim Fiscal Responsibility and Budget Management Act. 2010 (15 of 2010)

Medium Term Fiscal Plan for Sikkim: 2011-12 to 2013-14

1. Introduction – Fiscal Policy Overview

Growing emphasis on economic development in Sikkim in recent years has brought about visible transformation in local economy and society. The per capita income of the state has almost doubled from Rs.30562 in 2004-05 to Rs.57916 in 2009-10¹. The state has maintained a reasonably high rate of economic growth. The Gross State Domestic Product (GSDP) at current prices recorded a growth rate of 14.58 per cent during the period 2004-05 to 2009-10. The per-capita income (at current prices) also has grown at a high rate of 13.17 per cent during this period. The State Government has initiated major efforts to reduce poverty, expand social security measures, and provide educational and health facilities. The human development achieved by the state in terms of literacy rate and health status has been impressive² and its track record in social sector achievements has been remarkable

Ensuring sustainable fiscal balance for the provision of the required level of physical and social infrastructure is extremely important for the calibration of growth oriented fiscal policy in the state. Containing the fiscal deficit at a sustainable level is important to ensure that debt overhang does not cause unsustainable debt servicing burden. At the same time, it is important to allocate adequate resources for social and physical infrastructure to create an enabling environment for investments which would create employment and incomes for the people of the state.

The Government of Sikkim has enacted fiscal responsibility and budget management act (FRBM) in the fiscal year 2010-11. Introduction of Fiscal Responsibility and Budget Management (FRBM) Act and formulation of a medium term fiscal plan (MTFP) in the state is aimed at designing and implementing a rule based fiscal management system to ensure fiscal stability and sustainability while ensuring efficient provision of public services. The Act envisages a fiscal adjustment path recommended by the Thirteenth Finance Commission (TFC) for Sikkim limiting fiscal deficit at the targeted level to ensure sustainable level of debt, and improving transparency in a medium term framework during 2010-15. In this context the Act provides quantitative targets to be adhered to by the state with regard to deficit measures and debt level. The MTFP enunciates the broad fiscal management of the State Government to achieve the prescribed fiscal adjustment path in the medium term. The fiscal management principles enshrined in the Act call upon the state government to ensure transparency in setting and implementation of fiscal policy, stability and predictability in policy making process, improve the management of public finance and ensure intergenerational fairness, and improve efficiency in the design and implementation of fiscal policy related to management of assets and liabilities.

Enacting the FRBM Act was important for Sikkim to ensure fiscal stability and gain from the state specific grants recommended by the TFC. For Sikkim, the state-specific grants and the performance incentive grants, assume significance as regards their quantum and conditionalities. The basic necessary condition to avail these grants is the enactment of FRBM and adherence to the fiscal adjustment path recommend by the TFC for Sikkim. The government of Sikkim is keen to avail these funds to increase its revenue resources for development of the State. Sikkim, as per TFC’s projection does not qualify for NPRD grant and non-availability of NPRD in the last two years of 12th FC’s award period appeared to have adversely impacted on the fiscal balance of the state. It is thus important for the government of Sikkim to make every effort to avail these conditional grants to improve the fiscal position of the State. It needs to be noted here that, while, the State has not received the NPRD, the TFC, in recognition of the effort put by the State in achieving considerable progress in fiscal situation and challenges like cost disabilities recommended a performance grant as an incentive to continue on its path of fiscal prudence. As per the TFC’s recommendation, Sikkim also will be eligible to get benefits of debt consolidation as per the terms and conditions recommended by the 12th FC, provided the state enacts the FRBM.

The fiscal policy in the context of FRBM broadly focuses on critical areas like augmentation of revenues, rationalization of expenditure, debt restructuring and management, and above all strict enforcement of fiscal discipline and accountability. Indeed the fiscal management in terms of expenditure rationalization and revenue generation measures have helped in achieving perceptible improvement in fiscal situation of the State in the past, which has been recognised by the TFC in their report while recommending performance incentive grant for Sikkim.

The MTFP is divided into following sections. In Section 2, the economic growth achieved by the State in recent years is analysed. The Section 3 contains the fiscal policy overview, tax, expenditure, and borrowing policies for the ensuing year and the priorities in the medium term. This section follows the Form F-1 of the Medium Term Fiscal Policy as per the Sikkim FRBM Act, Rule 3. In Section 4, Medium Term Fiscal Plan containing the projection of fiscal variables and assumption underlying the projections has been given. This follows the Form F 2 of the Medium Term Fiscal Policy as per the Sikkim FRBM Act, Rule 3. The concluding remarks are contained in section 5. The disclosures, following the Medium Term Fiscal Policy as per the Sikkim FRBM Act Rule 3 and Rule 4, are given in the Section called Disclosures.

2. Macroeconomic Outlook

An assessment of the recent economic performance of the State is essential while preparing MTFP for the State. Role of fiscal policy is crucial in creating efficient levels of infrastructure and promoting human development to provide a strong basis for economic growth and development. While the level of economic growth influences the revenue performance, fiscal discipline and allocation of resources consistent with policy priorities help in stability, growth and equity aspects of the economic policy. Preparation of a medium term fiscal policy framework for the State enables continuity in decision making and helps in improving revenue effort and expenditure planning. As mentioned earlier, the average growth of the State's economy during the period 2004-05 to 2009-10 was 14.58 per cent. The sectoral composition of the GSDP is dominated by the Service sector. In the year 2008-09, the share of services was 48.28 per cent and that of Manufacturing and Primary sector was 34.66 and 17.22 per cent respectively. TFC has assumed a nominal growth rate of 11.08 per cent in GSDP for Sikkim during the period 2010-15. However, based on the trend of growth in Sikkim, a higher growth rate of GSDP for Sikkim is definitely attainable. However the MTFP is based on the GSDP growth path prescribed by the TFC for Sikkim. If we take the actual GSDP growth, the nominal borrowing quantum would be higher.

3. Fiscal Profile of the State

3.1 Fiscal Improvement in Recent years

Sikkim has maintained surplus in the revenue account during the period 2004-05 to 2011-12 (BE) (Table 1). The own revenue receipt of the State has improved from 13.13 per cent relative to GSDP in 2004-05 to 19.54 per cent in 2009-10, the last year for which audited figures are available. The own revenue receipt is expected to decline to 14.46 per cent as per the BE 2011-12. The revenue expenditure, while on a declining path from 2004-05 level of 48 per cent, started increasing from 2009-10 and is expected to be 54.35 per cent in 2011-12 BE. The TFC, in recognition of the effort put by the State in the past in achieving considerable progress in fiscal consolidation and also recognizing and the challenges like cost disabilities faced by the states, recommended a performance grants.

The fiscal deficit in the State has shown wide fluctuations. While, the fiscal deficit showed a declining trend relative to GSDP after 2004-05 and came down to 2.56 per cent in 2007-08, it has increased since then. However, fiscal deficit reached to a level of 13.22 per cent in 2010-11 RE primarily due to the implementation of the Pay Commission award. The fiscal deficit is expected to be 3.5 per cent of GSDP in 2011-12 BE. After three consecutive years of primary deficit, the BE 2011-12 expects to generate a primary surplus to the order of 1.06 per cent of GSDP. The outstanding debt to GSDP ratio is expected to decline from a level as high as 70.46 per cent in 2009-10 to 64.12 per cent in 2011-12 BE.

Table 1

Fiscal Profile of Sikkim: An Overview

(% to GSDP)

Source (Basic Data): Finance Accounts and State Budget 2011-12

Note: The GSDP figures are of 2004-05 series given by CSO.

Negative sign indicates revenue surplus

The TFC in their fiscal consolidation path for Sikkim has targeted the fiscal deficit to decline to 3 per cent of GSDP by 2013-14 and continue thereafter at that level. The State FRBM act, enacted in 2010-11, stipulates to reduce the fiscal deficit to 3 per cent of GSDP by 2013-14. Also necessary amendment in the Act is done to comply with the numerical debt to GSDP ratio path proposed by the TFC. The MTFP 2011-12 is compliant with the TFC proposed path of fiscal consolidation.

3.2 Revenue Mobilisation

Revenue profile is dominated by central transfers. Central transfers to GSDP ratio has increased sharply in recent years and in 2011-12 BE it is expected to be 62.48 per cent. This increase is due to the large increase in transfers in the form of grants to the State. Own tax and own non–tax revenue are expected to be 6.38 and 8.08 per cent of GSDP respectively as per the BE of 2011-12. A disaggregated analysis of revenue performance of the state is undertaken to determine the revenue prospects while preparing the MTFP aligned with the provisions of FRBM act of Sikkim.

Composition of own tax revenue is given in Table 2. Like other States, the sales tax/VAT is the major source of own tax revenue in Sikkim accounting for about 59 percent of own tax revenue. The relative share of VAT in total own tax revenue has increased in recent years. In 2009-10, the VAT accounted for about 54 per cent as against 41 per cent in 2004-05. The revised estimates of 2009-10 and the budget estimates for 2010-11 show further increase in the share of VAT revenue. The State excise is another important source of revenue for the State, share of which has increased in recent years. During the same time period the share of motor vehicle tax has increased. The trend growth rates of individual tax components explain the change in tax structure in the state. The taxes like excise duty and VAT have shown higher growth rates compared to other taxes during the period.

Table 2

Composition of Own Tax Revenue

(Per cent)

The tax specific buoyancies are given in Table 3. The buoyancy of VAT during this period was 1.320. Motor vehicle tax and other tax also showed higher than unity buoyancy. The buoyancy coefficients of taxes like excise and stamp duty were below unity.

Table 3

Buoyancy of Taxes: 2004-05 to 2011-12

Source (Basic Data): Finance Accounts and State Budget 2011-12

The non-tax revenue is an important source of revenue for the State as it constitutes more than half of the own revenue receipts. Income from State lottery, power sector and road transport has been the main source of non-tax revenue (Table 4). The income from power sector has increased over the years. The power sector has made significant contribution based upon the income from the hydel power projects. The income from power sector constituted about 50 per cent of State’s own non-tax revenue during 2004-05 to 2011-12 BE. The income from lottery operations is another important source of non-tax revenue for the State. The Government has ventured into broad basing the lottery operations with the introduction of the on-line lotteries. Further the State has introduced on-line casino operations with the passage of Sikkim Casino Games (Control & Tax) Act 2002. These initiatives are expected to yield increasing revenue from lottery operations.

Table 4

Composition of States’ Own Non-tax Revenues

(Per Cent)

Source (Basic Data): Finance Accounts and State Budget 2011-12

Figure 1

Central Transfers as Percentage of GSDP

The tax devolution and grants as a percentage of GSDP shown in Figure 1 reveal that even though the tax devolution to GSDP remained more or less at around 15 per cent of GSDP, the grant to GSDP ratio showed a sharp increase in recent years. The revised estimates of 2010-11 and budget estimates of 2011-12 show improvements in grants from Centre. The State of Sikkim will receive the TFC grants for universalisation of elementary education, environment related grants including forest, renewable energy, and water sector management, incentive grants to improve quality of public expenditure, and grants for maintenance of roads and bridges. The State of Sikkim will also receive performance incentive grant, which was recommended by the TFC in response to prudent fiscal management of the State. In addition, the TFC also recommended State specific grants for Sikkim for development of tourism, innovation of Suspension Foot Bridges under North Districts of Sikkim, water Security and public health engineering, police training and infrastructure, residential facility for police, boarder area development, State Capacity building Institute, and conservation of heritage and culture. These grants will contribute substantially to the overall revenues of the State and facilitate building infrastructure in the sectors for which grants are targeted.

3.3 Expenditure

The profile of government expenditure of Sikkim is shown in Table 5. The revenue expenditure relative to GSDP is expected to decline to 54.35 per cent in 2011-12 (BE) as against 58.02 per cent in 2010-11 (RE). The impact of pay revision with associated liabilities towards settlement of arrears has put upward pressure on revenue expenditure seem to have been absorbed. The revenue expenditure profile shows that while there is an increase in the expenditure on general and economic services to GSDP ratio, the expenditure on social services remained almost at the same level as percentage of GSDP during this period. The MTFP elaborates on the expenditure restructuring in the medium term during which it is targeted to have higher level of development spending.

Table 5

Expenditure profile

(Per cent to GSDP)

Source (Basic Data): Finance Accounts and State Budget 2011-12

The capital expenditure, although uneven and fluctuating, shows a rising trend in recent years. The capital expenditure is expected to increase from 20.38 per cent of GSDP in 2004-05 to 26.08 per cent in 2011-12 (BE) (See Table 5). The profile of capital expenditure shows that the sectors like water supply and sanitation, transport and tourism have attracted large capital expenditure. While there is a need to augment capital expenditure in critical areas of social and physical infrastructure, the State needs to comply with the fiscal reforms prescribed by the TFC to bring about fiscal discipline in the State and that can put a limit on the level of capital expenditure. Concerted efforts are needed to restructure government spending in a manner that sufficient fiscal space is created to enable the government to spend on critical areas. The MTFP is prepared based on this rationale.

Table 6

Composition of Capital Expenditure

(Per Cent)

Source (Basic Data): Finance Accounts and State Budget 2011-12

3.4 Outstanding Debt and Government Guarantee

As mentioned earlier, the outstanding debt of the Government of Sikkim is declining in relation to GSDP in recent years. However, it is still at a very high level. The outstanding debt as per cent of GSDP, which was 61.88 per cent in 2004-05, increased to 70.46 per cent in 2009-10 and started declining thereafter (See Table 7). The accumulated stock of debt is the outcome of the fiscal profile that has emerged over the years. The structure of outstanding debt has an important bearing on interest payment as different debt instruments carry different rates of interest depending on the type of borrowing and maturity structure. The internal debt including the market borrowing in the State has increased over the years while the share of loans and advances from the Central government has declined substantially (Table 7). The share of high cost debt instruments like small savings, provident funds, etc. has registered a decline over the years.

Table 7

Composition of Debt

(Per Cent)

Source (Basic Data): Finance Accounts

The Planning Commission of India has indicated six parameters to determine the quality of debt stock of any States³.

1. The Debt Stock should be below 30 per cent of the GSDP.

2. Debt should be below 300 per cent of the Total Revenue Receipts (TRR).

3. The interest payment should be less than 18 per cent as a ratio of TRR.

4. The debt growth should not be more than 1.25 times the growth in revenues.

5. The revenue component of the fiscal deficit should not be more than 50 per cent.

6. The fiscal deficit should not be more than 25 per cent of the TRR.

The degree of debt overhang for Sikkim as examined taking into consideration these criteria is given in Table 8. The debt ratio remained much above 30 per cent of GSDP in recent years (see Table 8). However, the debt as a percentage of TRR remained much below 300 per cent and declining sharply in recent years and it is expected to be as low as 83.35 per cent in 2011-12 (BE). The interest payment as a percentage of TRR remained below 18 per cent as indicated in the Planning Commission parameters. The state government could generate a revenue surplus and the ratio of debt growth to revenue growth is below the permissible target of 1.25. The state’s fiscal deficit remained below 25 per cent of the TRR.

Guarantees given by the State Government

As per the Sikkim Government Guarantee Act, 2000, the ceiling on total outstanding government guarantee in a year is restricted to three times of the State’s tax revenue receipts of the second preceding year. The outstanding sums guaranteed by the State government on 31st March 2009 were Rs.75 crore (see Finance Accounts – 2008-09, Government of Sikkim), which was lower than the tax revenue of the State in the year 2006-07. However, the guarantee has increased to Rs. 360 crore in 2010-11 but remained within the permissible limit prescribed in the Guarantee Act-2000, when compared with the revenue receipts of the second preceeding year.

Table 8

Indicators of Debt Management

(Per Cent)

4. Medium Term Fiscal Plan: 2010-11 to 2012-13

The Government of Sikkim has enacted the FRBM act in 2010-11 and this is the first MTFP document containing the fiscal projections for the period 2011-12 (BE) to 2013-14. The first year of the MTFP is the budget year. While preparing the MTFP it was assumed that economy of Sikkim will grow at the rate of GSDP growth prescribed by the TFC on a year on year basis for the period from 2010-11 to 2013-14. The aggregate own tax revenue buoyancy of the State for the period between 2004-05 and 2011-12 (BE) is 1.272. For the purpose of MTFP, prescriptive buoyancies for individual taxes have been the observed buoyancy of taxes for the period from 2004-05 to 2011-12 (BE) reported in Box 1. The MTFP proposes to keep the trend growth rate of non-tax revenues for the period from 2004-05 to 2011-12 (BE) for the purpose of projection. In the case of central transfers also, the recommended State specific grants by the TFC are factored in during the projection year. For the share in central taxes budgetary figures for the year 2011-12 are taken and these are allowed to grow at observed rate of trend growth rate during 2004-05 to 2011-12 (BE).

Expenditure Restructuring under MTFP

The MTFP aims to keep the Government’s priority of emphasizing on development expenditure. The MTFP does not attempt to compress the revenue expenditure as the surplus in the revenue account has been large and the measures to compress the expenditure may adversely affect the spending in the development sector in revenue account. The revenue expenditure during the MTFP period is projected to increase from 54.35 per cent relative to GSDP in 2011-12 (BE) to 60.23 per cent in 2013-14. The rise in revenue expenditure is due to the increase in general services expenditure by more than 2 percentage points and also social and economic services expenditure by around 2 percentage points relative to GSDP.

Debt and Deficit under MTFP

The revenue augmentation measures and the expected central devolution discussed above is expected to generate a revenue surplus profile as given in Table 9. With the prescriptive buoyancy of own tax revenues and growth of expenditure suggested, the State is expected to increase its revenue surplus further during the MTFP period (See Table 9). The fiscal deficit as per the BE 2011-12 is estimated to be 3.5 per cent of GSDP, while in the year 2012-13 and 2013-14, the fiscal deficit target is fixed at 3.5 and 3 per cent respectively to comply with the Sikkim State specific path of fiscal adjustment prescribed by the TFC. The emerged fiscal profile shows a decline in the debt stock to GSDP ratio from 64.12 per cent in 2011-12(BE) to 61.14 per cent in 2012-13 and 57.96 per cent in 2013-14. This debt-GSDP ratio path complies with the debt path for Sikkim proposed by the TFC. The TFC has assumed a debt-GSDP ratio of 65.2 in 2011-12, 62.1 in 2012-13 and 58.8 in 2013-14 (see Report of TFC, Annex 9.1, pp 409). Also during this period, the capital expenditure to GSDP ratio is expected to increase from 26.08 per cent in 2011-12(BE) to 32.51 per cent in 2013-14. It needs to be emphasized here that the State Government is committed to achieving the objectives of the FRBM Act to reduce fiscal deficit and stabilize the debt burden and conform to the debt target proposed by the TFC in their fiscal consolidation path for Sikkim.

Box 1

Proposed MTFP Targets

Table 9

Medium Term Fiscal Plan: 2011-12 (BE) to 2013-14

(Per cent to GSDP)

5. Conclusion

The Government of Sikkim enacted the Fiscal Responsibility and Budget Management Act in 2010 and this MTFP as required under the Act provides the medium term fiscal plan in the State for the year 2011-12 (BE) to 2013-14. As per the FRBM Act and the proposed MTFP, the State Government is committed to reduce the fiscal deficit and stabilize the debt burden to the numerical targets proposed by the TFC. The MTFP for the period 2011-12 to 2013-14 is framed with realistic assumptions about expenditure and revenue growth in the next three years. This MTFP shows that the government would have sufficient fiscal space for development spending while complying with the MTFP targets in terms of revenue deficit, fiscal deficit and debt to GSDP ratio.

Disclosures

Form D-1

(See Rule 4)

Select Fiscal Indicators

Form D-2

(See Rule 4)

Components of State Government Liabilities

Form D-3

(See Rule 4)

Guarantees Given by the Government (Rs. Lakh)

Form D-4

(See Rule 4)

Number of Employees in Public Sector Undertakings & Aided Institutions and Expenditure of State Government

NB: A few Public Sector Enterprise / Undertaking are in the process of winding up / closure. Hence the updated information on the actual number of employees, the expenditure on salaries & pension shall be placed subsequently.

Form D-2

(See Rule 4)

Components of State Government Liabilities

Form D-4

(See Rule 4)

Number of Employees in Public Sector Undertakings & Aided Institutions and Expenditure of State Government