1. PA 512
INSTRUCTOR: DR. C. COE
GUJARAT: BUDGET PROJECT
SHANTANU BASU
NORTH CAROLINA STATE UNIVERSITY
RALEIGH, NC 27695
DATE OF SUBMISSION: DEC 3 2008

2. I-D: 000796781 Basu 1
Table of Contents
1. Gujarat: Brief Background, ............................................................................................. 2
2. Budget & Accounts ......................................................................................................... 3
2.1 Budget Process ............................................................................................................ 4
2.2 Fiscal Management ..................................................................................................... 4
3. Sources of Revenue......................................................................................................... 6
3.1 State’s Own (Internal) Revenue .................................................................................. 7
3.1.1 Non-Tax Revenue ....................................................................................................... 8
3.1.2 Public Debt.................................................................................................................. 8
3.1.3 Transfers from the Central Government ..................................................................... 8
4. Expenditure ..................................................................................................................... 9
4.1 Quality of Expenditure .............................................................................................. 10
4.2 Assets & Liabilities ................................................................................................... 11
4.2.1 Return on Investment ................................................................................................ 11
4.3 Undischarged Liabilities ........................................................................................... 12
4.3.1 Fiscal Liabilities ........................................................................................................ 12
4.3.2 Guarantees................................................................................................................. 13
4.4 Debt Sustainability .................................................................................................... 13
4.4.1 Debt Stabilization...................................................................................................... 14
4.4.2 Sufficiency of Non-debt Receipts ............................................................................. 14
4.4.3 Net Availability of Borrowed Funds......................................................................... 14
4.5.1 Deficit Trends ........................................................................................................... 15
4.5.2 Quality of Deficit/Surplus ......................................................................................... 16
4.6 Fiscal Ratios .............................................................................................................. 16
5. Externally Aided Projects (EAP) .................................................................................. 17
6. Foreign Investment ....................................................................................................... 17

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1. Gujarat: Brief Background1,2
The state of Gujarat is located on the western shoreline of India
adjoining the Arabian Sea. Its history stretches back to about 3500BC
when it was home to Iron Age settlements belonging to the Indus
Valley Civilization. Ruled by various dynasties, Hindu and Muslim,
over the last 3000 years, the state has a checkered history. At
Independence in 1947, the local principalities merged into the
erstwhile Bombay State. In 1960, following reorganization of states on
linguistic basis, Gujarat became a separate state of the Indian Union. The state has a 1000-mile
coastline and a population of about 55 million, 37.36% of which is urban. The average literacy
Fig. 1: Growth of State Gross Domestic Product rate is 70%. The Chief
350000 20 Minister, Mr. Narendra Modi,
18
300000 is the elected head of
16
Percentage Growth
Rupees in Crore
250000 14
($1 = Rs. 50)
government and Council of
200000 12
10 Ministers while the Governor,
150000 8
Mr. NK Sharma, is the
100000 6
4 constitutional head. The state
50000
2
0 0 has a per capita income of Rs.
2003-04 2004-05 2005-062006-07 2007-08 37532 (PPP $ 7506) at current
Fiscal Year prices against an all-India
GSDP Growth of GSDP(%)
average (2006-07) of Rs.
20734 (PPP $ 4145). The GSDP (2007) is estimated at approximately $52.06 billion at current
prices with India’s highest annual growth rate of 14.32% per capita per annum from 2005-06 to
2008-09 and NSDP of Rs. 57048 (PPP $11410) at current prices as shown in Fig. 1. With over
300,000 small scale units, over 2200 large and medium industries, 83 closely integrated
industrial clusters, 182 industrial estates and 33 Special Economic Zones with flexible labor laws
and an easy exit policy Gujarat is one of the most industrialized states of India. Gujarat has a
1
To the extent available, figures in this paper relate to fiscal years 2004-05 to 2008-09 (inflation adjusted). Where
accounts figures have had to be utilized, comparison from 2002-03 to 2006-07 (inflation adjusted) is used, since
accounts for 2007-08 are not yet available online.
2
Sources for this paper include the Finance, Revenue & Foreign Investment Departments and Chief Minister’s
Office of the Government of Gujarat, and Reserve Bank of India, Ministry of Finance Government of India, and
Comptroller &Auditor General of India, Asian Development Bank, The Economic Times and Financial Express
(India).

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16.2% share in India’s industrial production and the lowest percentage of person-days lost of
0.52% due to labor unrest. It is home to three major private ports, the world’s sixth largest
integrated petroleum refinery (580,000 bpd) and lately, the 500,000 cars per annum plant for the
world’s cheapest passenger car, the TATA Nano.
2. Budget & Accounts
Due to the unitary system of government in the Indian Constitution, Gujarat follows the
central government’s rules and schedule on the budget, accounts and audit. The fiscal year is
from April 1 to March 31 for all state governments and the central government. While the
Budget Estimates (BE) are drawn and presented to the state’s legislature as Department wise
demands for grants on the last working day of February every year, this exercise repeated again
in November every year when the budget is updated and corrected mid-year and Revised
Estimates (RE) presented to the legislature during its winter session. The departments are
required to submit their Estimates to the Finance Department by October 31 of the preceding
year for BE and by August 31 of the current fiscal for the RE. Budget figures in gross terms and
net expenditure worked out at the end of each fiscal year, after taking into account receipts and
adjustments. For revenue proposals, the legislature passes an omnibus Finance Act while
expenditure covered by a corresponding Appropriation Act. The budgets are line item and the
legislature has full powers to curtail/add to it by a simple majority. However, such modifications
are rare since the majority party in the legislature also leads the government in the state. The
Governor does not have any powers of modification of the budget and only assents to legislative
Acts.
The prescribed format splits the proposed expenditure in two parts – administrative (non-
Plan) and developmental (Plan) and within them revenue and capital. These parts again have a
central and state component each to account for the sources of funds. The budget is accounted
using three funds – Consolidated and Contingency Funds and Public Account (for debt). The
format of accounts and budget, compiling consolidated accounts and audit of the state accounts
done by the Comptroller & Auditor General of India, in terms of Articles 149-151 of the
Constitution, through the Principal Accountant General/Accountants General of the State. The
report and certified accounts presented to the legislature, generally in the budget session of the
legislature in the following calendar year.

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2.1 Budget Process
The Finance Department issues a circular on May 31 to all departments of the state
containing guidelines and formats in which the BE is to be submitted to them. Upon receipt of
this circular, the departments addressed their constituent units, subordinate and attached offices
for their respective Budget Estimate (BE) by July 31 with proper justification based mainly on
immediate and intermediate outcomes using measures of output and efficiency in support of their
proposals and budget figures. Each unit head meets his/her officers (not in retreat) while
finalizing revenue and expenditure projections. Thus, the Commercial Taxes and Excise
Departments would work out revenue projections based on current legislation and cost of
collection for each collection zone. The Public Works and Irrigation Departments would
similarly, work out their revenue (for irrigation farm supply or revenue from toll roads) and
expenditure (by schedule of sanctioned works within the capital improvement plan) by executing
division. Each head of department consolidates the BE for his/her department and submits it to
the Finance Department by Aug 31. The Principal Finance Secretary of Gujarat then circulates a
schedule for meetings with department heads to finalize the BE. During these meetings, final
adjustments carried out so that the fiscal deficit, if any, minimized and the government’s political
priorities taken into account.
2.2 Fiscal Management
The State Government enacted the Gujarat Fiscal Responsibility Act, 2005 to ensure
prudence in fiscal management and fiscal stability by progressive elimination of revenue deficit,
sustainable debt management consistent with fiscal stability, greater transparency in fiscal
operations of the government and conduct of fiscal policy in a medium term fiscal frame work.
To give effect to the fiscal management principles as laid down in the Act and /or the rules
framed there under, the Government prescribed the following fiscal management targets:
Reduce the revenue deficit in each financial year commencing from April 1, 2005
to eliminate it by March 31 2008 and maintain it at that level or generate revenue
surplus thereafter.
Reduce fiscal deficit in each financial year commencing from April 1 2005 to
bring it down to not more than three per cent of GSDP by March 31 2009.

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Cap within a period of three years commencing from April 1 2005 and ending on
March 31 2008, the total public debt of the State Government at thirty per cent of
estimated GSDP for that year.
Cap outstanding guarantees within the limit provided in the Gujarat State
Guarantees Act, 1963.
The revenue deficit and the fiscal deficit may exceed the specified limits due to unforeseen
circumstances or natural calamity to the extent of actual fiscal cost spent to meet the situation.
Following the recommendations of the 12th Finance Commission (TFC) and the State
Fiscal Responsibility and Budget Management (FRBM) Act, the State developed its own Fiscal
Correction Path; indicating the milestones of outcome indicators with target dates of
implementation from 2004-05 to 2009-10. As prescribed in the Act, the State Government was
required to lay the following statements of fiscal policy along with the budget before the
Legislature:
The Medium Term Fiscal Policy Statement (MTFPS) and
The Fiscal Policy Strategy Statement
setting forth the fiscal objectives, strategic priorities of the State Government and a three-year
policy target for fiscal management. The State Government in its MTFPS estimated own tax
revenue at Rs 162.44 billion for 2006-07. The State estimated its own nontax revenue at Rs
33.34 billion in 2006-07 and estimated growth rates of 7% and 4.95% for plan and non-plan
revenue expenditure respectively, for 2005-06 and onward. Average cost of borrowing for 2006-
07 estimated at 9.33% while growth rates of salaries and pension payments at 3.8-4% and 9%
respectively.
The State achieved the fiscal targets laid down in the Gujarat Fiscal Responsibility Act,
2005, one year ahead of schedule, with 2006-07 ending in a revenue surplus of Rs 17.70 billion.
Fiscal deficit at Rs 56.48 billion during 2006-07 remained at 2.38% of GSDP. The guarantees
given were also well within the limit prescribed in the Act. The ratio of Public Debt to GSDP at
30.60% during current year stood a little higher than the Act-prescribed cap of 30% at the end of
2007-08. In view of the fiscal performance of the State measured by trends in revenue and fiscal
deficits relative to their base year values and improvements over 2005-06, the State received debt

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waiver of Rs 8.46 billion as an incentive under Debt Consolidation and Relief Facility (DCRF)
from the Government of India in fiscal 2006-07.
3. Sources of Revenue
Fig. 2 shows the receipts of the State from 2004-05 to 2008-09. Total revenues of the
State have increased by 55.52% in the past five years at current prices.
Fig. 2: Growth of Revenues 2004-05 to 2008-09
900
700
Rs in Billion
500
300
100
-100 2004-05 2005-06 2006-07 2007-08 2008-09 (Est)
Fiscal Year
Revenue Capital Public Account Total Revenues
The profile of revenue sources also has changed from 2004-05 to 2008-09 as shown in
Figs. 3 & 4. Gujarat’s own revenues, as a proportion of gross revenue receipts, have increased by
13.65% while central transfers expected to increase by 4.86% from 2004-05 to 2008-09.
Fig. 3: Profile of Revenue Sources 2004-05 Fig. 4: Profile of Revenue Sources 2008-09
Own Taxes Non-tax Central Transfers Grant-in-Aid Own Taxes Non-tax Central Transfers Grant-in-Aid

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3.1 State’s Own (Internal) Revenue
Revenue receipts of the state projected to rise by 88.90% in 2008-09 over 2004-05. Based
on Census 2001 projections, this translates to Rs. 14216 per capita in 2006-07 and further to Rs.
18355 in 2008-09 at current prices, a rise of 29.11% in three fiscals. However, return on
investment from state undertakings remains a cause for concern having risen marginally from
0.84 in 2002-03 to 1.92 in 2006-07. Continuous improvement in revenue account that show a
surplus during the current year, declining fiscal deficit and increasing trend in the share of capital
expenditure in total expenditure of the government have resulted in the improvement in the ratio
of assets to liabilities to 66% in 2006-07 from 56% in 2004-05. The fund balance of the State
rose to Rs. 93.61 billion in 2006-07 at current prices, an increase of 28.79% over 2005-06.
The largest single rise of 104.87% is in sales tax since the State implemented the Value
Added Tax (VAT) from April 2006. Buoyancy of revenues is evident from a negative Rs. 67.32
billion in 2002-03 to a surplus of Rs. 17.70 billion in 2006-07 at current prices, a 126.29%
improvement; primary deficit of all states together was Rs. 134.75 billion (-0.29 ratio to GDP).
This buoyancy has reflected in improving the revenue to fiscal deficit ratio from 1.03 in 2001-02
to a surplus in 2006-07 and led to an increase in the asset base of the state. Overall revenue
buoyancy ratio has risen from 0.81 in 2002-03 to 2.48 in 2006-07. A highlight is the 75.73%
Fig. 5: Elasticity of Revenue 2003-04 to 2007-08
16000
14000
12000
INR in Crore
10000
8000
6000
4000
2000
0
2003-04 2004-05 2005-06 2006-07 2007-08
Fiscal Year
Sales Tax Profession Tax Electricity Duty
Motor Vehicle Tax Passenger Tax Stamp Duty
Entertainment Tax Luxury Tax (hotels) Prohibition & Excise Duty

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increase in non-debt receipts from 2002-03 to 2006-07 that has served to fully cover primary
revenue and partly capital expenditure with a Rs. 12.48 billion surplus at current prices in 2006-
07; all states together covered only 5.6% of the fiscal deficit from budgetary surpluses in 2007-
08. The primary sources of Gujarat’s own revenue have remained mainly inelastic except for
passenger and entertainment taxes as shown in Fig. 5 that have helped to keep revenue
projections stable over a span of time. The state has limited excise tax revenue from alcohol
owing to a historical prohibition policy, the state having been home to Mahatma Gandhi, a
staunch prohibitionist.
3.1.1 Non-Tax Revenue
Non-tax revenue estimated to increase by 44.27% to Rs. 44.59 billion in 2008-09 at
current prices over 2004-05. In fact, the State exceeded the target set by the TFC by 39.29% in
2006-07. However, there is a decline of 7.57% from 2001-02 to 2006-07 as part of total revenue
receipts.
3.1.2 Public Debt
Public debt capital receipts have been steadily declining since their peak in 2003-04.
Such receipts have declined from 98.68% in 2003-04 to 89.66% in 2006-07 of total capital
receipts. Such decline is mainly due to steep increase in revenues that have offset the need to
borrow.
3.1.3 Transfers from the Central Government
The Finance Commission (FC) set up every five years by the central government
determines sharing of tax resources between states and the central government. Share of taxes
from the Central Government per the formula of the 12th Finance Commission (TFC) has
increased such revenues for the State by 172.44% in 2008-09 over 2004-05 in real terms. The
increase in Central tax transfers was mainly due to increase in Corporation Tax, Union Excise
Duties, and Taxes on Income other than Corporation Tax, Customs and Service Tax. With
manifold increase in tax collection, particularly on income and services, transfers to states have
increased substantially over the last five years. The FC also gives states that achieve revenue
collection targets beyond the benchmark approved by the FC, additional transfer incentives.

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4. Expenditure
Revenue expenditure maintains the current level of services and payments for past
obligations and does not result in any addition to the State’s infrastructure and service network.
Therefore high revenue expenditure is symptomatic of a state’s less than average fiscal health.
Fig. 6 shows the profile of expenditure on revenue account from 2004-05 to 2008-09 at current
prices.
Fig. 6: Revenue Expenditure Profile 2004-05 to 2008-09
35
Percentage of
25
total expdn.
15
5
-5 2004-05 2005-06 2006-07 2007-08 2008-09
Fiscal Year
General Services Social Services Economic Services Miscellaneous Services
The ratio of non-plan revenue expenditure to total expenditure declined from 84.59% in
2001-02 to 62.68% in 2006-07, except in 2004-05 (post-earthquake fiscal). The ratio of non-plan
revenue expenditure to revenue receipts declined from 1.31 in 2001-02 to 0.76 in 2006-07,
indicative of better expenditure management by the State. However, non-plan revenue
expenditure in 2006-07 exceeded the normative assessment by TFC by 28.15%. Although the
State Government in its Medium Term Fiscal Policy Statement projected 7% and 4.95% growth
rate for plan and non-plan revenue expenditure respectively, the actual growth rates substantially
exceeded the limit prescribed for 2006-07. Correspondingly, revenue expenditure buoyancy to
GSDP increased from 0.29 in 2005-06 to 1.55 in 2006-07 while buoyancy of revenue
expenditure to revenue receipts increased by 15% in 2006-07 as compared to 5% in 2005-06.
Expenditure on salaries and wages at Rs 26.69 billion in 2006-07 was the lowest during
2002-07. Measures like abolition of vacant posts, re-deployment of existing staff to avoid filling
up of vacant posts and recruitment of essential staff mostly on fixed pay basis, initiated by the
State Government, helped in containing the expenditure on salaries and wages. As percentage of

11. I-D: 000796781 Basu 10
GSDP, expenditure on salaries and wages declined during 2002-07. During 2006-07, the
expenditure on salaries and wages stood at 1.12% of the State’s GSDP and 8.60% of revenue
receipts. However, with improving health, pensions constituted 8% of revenue expenditure and
1.01% of GSDP; this trend would rise in the coming years.
The State had projected in the FRBM Act, interest payment as 20.59% of revenue
receipts in 2006-07. However, interest payments as a percentage of revenue receipts were 22% in
2006-07 primarily due to increasing small savings collections in the State. Interest payments
during 2006-07 exceeded the normative assessment of TFC (Rs 69 billion) by Rs 3.20 billion
owing to higher borrowings in previous years. A positive side has been the decline of subsidies
on electricity and agriculture from 16.50% in 2001-02 to 7.51% in 2006-07 that has reduced
pressure on revenue expenditure.
4.1 Quality of Expenditure
Fig. 7 shows an overview of capital vs. revenue expenditure, in terms of total expenditure
and as a percentage of GSDP. It is evident that revenue expenditure continues to account for
about 60% of total expenditure.
Fig. 7: Quality of Expenditure 2002-03 to 2006-07
100
Percentage
10
1
2002-03 2003-04 2004-05 2005-06 2006-07
Fiscal Year
Capital (% of total exp) Capital (% of GSDP)
Revenue (% of total exp) Revenue (% of GSDP)
Even within capital expenditure on revenue account, there are wide divergences. For instance,
the ratio of capital to revenue expenditure for social services such as health is .05, education .05
and other social services .07; water supply and sanitation however, is healthier at .55 in 2006-07.
Although, such outlays may seem negligible, yet the situation has improved substantially
considering the corresponding figures of .0016, .018, .17 and .57 in 2001-02. The State has fared

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better in providing economic services, particularly in irrigation (in a drought endemic state) that
showed an improvement from .29 in 2001-02 to 7.4 in 2006-07. There is also major
improvement with ratios of .668 in energy (-.13 in 2002-02) and transportation of .58 (up from
.42 in 2001-02). The overall ratio of capital to revenue expenditure for economic services stood
at a relatively healthy 0.96. Financial assistance to local governments also increased from
13.08% of revenue expenditure in 2001-02 to 19.73% in 2006-07.
4.2 Assets & Liabilities
The historical Government accounting system does not provide for comprehensive
accounting of fixed assets like land and buildings owned by the Government. Nonetheless,
Government accounts capture the financial liabilities of the Government and the assets created
from expenditure incurred. While the liabilities consist mainly of internal borrowings, loans and
advances from the GOI, receipts from the Public Account and Reserve Funds, assets comprise
capital outlay, loans and advances given by the State Government and cash balances.
4.2.1 Return on Investment
Return on capital investment in 2006-07 in irrigation projects was only 10.48% in 2006-
07. A similar situation, though improved, shows in the public sector enterprises where
percentage of return has risen from 0.55 in 2001-02 to 1.92 in 2006-07 that leaves an uncovered
gap of 6.27% between the return and the interest paid by government on loans taken by these
entities. If all loans and advances made by the State to the public sector and cooperative sector
(primarily dairy farming) are considered, the State has, while paying an average of 8.19%
interest rate on borrowings, gets a -7.19% rate of return; primarily by way of unpaid installments
of principal, interest and dividend. Outstanding balance awaiting repayment as on March 31,
2007 was Rs. 46.65 billion. Adding to this are 261 incomplete projects upon which Rs. 159.76
billion was cumulatively spent until March 31, 2007. Apart from other reasons, thin spread of
resources is one of the reasons for delay in completion of the projects that not only blocked
limited resources, caused time and cost overruns and delayed accrual of benefits from the
projects to the State.
The State has implemented Phase-I of its Public Sector Restructuring Program (PSRP)
from 1996 to 2003 with Asian Development Bank (ADB) support covering 24 state-owned
enterprises (SOEs). Under PSRP seven SOEs have been shut down, two privatized, three

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partially disinvested, two merged while eight were in advanced stages of restructuring. 21924
employees were voluntarily for which compensation of Rs.4.9 billion was paid to ex-employees.
This exercise has closed/restructured/ transferred Rs. 33.75 billion to the private/joint Sector with
savings of Rs. 4.77 billion and annual recurring savings of Rs. 1.11 billion from State Budget
because of voluntary separation of workers. Simultaneously, the State created a Social Safety
Net and constituted the State Renewal Fund (SRF) in Sept 1996 to provide funds for voluntary
separation expenses to SOEs covered under the PSRP (Phase – I).The second phase of this
project is in the initial planning stage.
4.3 Undischarged Liabilities
4.3.1 Fiscal Liabilities
The overall fiscal
liabilities of the State
increased from Rs 453.01
billion in 2001-02 to Rs
879.71 billion in 2006-07. The
average growth rate from
2002-03 to 2006-07 was
14.26% although it declined
to 8.12% during 2006-07 over 2005-06. The ratio of fiscal liabilities to GSDP ranged narrowly
between 36.66% and 38.18% during 2001-07 as shown in Fig. 8. These liabilities stood at 284%
of revenue receipts and 376%
Fig. 9: Ratio of Fiscal Liabilities 2002-03 to 2006-07
15 of the State’s own resources
in 2006-07. The buoyancy of
10 fiscal liabilities steadily
Percentage
declined from 1.17 in 2001-
5 02 to 0.85 in 2006-07 as
shown in Fig. 9. A significant
0 decrease in buoyancy of
2002-03 2003-04 2004-05 2005-6 2006-07
Fiscal Year fiscal liabilities to revenue
GSDP Revenue Resources Own Resources receipts during 2006-07 was

14. I-D: 000796781 Basu 13
essentially due to much higher growth in revenue receipts. The spike in 2003-04 is primarily due
to a major earthquake that adversely affected the state’s finances. Table 1 gives an overview of
the basic parameters of the State’s fiscal liabilities.
Table 1
2002-03 2003-04 2004-05 2005-06 2006-07
Fiscal Liabilities (Rupees in billion) 525.72 628.76 710.83 813.67 879.71
Rate of Growth (%) 16.05 19.60 13.05 14.47 8.12
Ratio of Fiscal Liabilities to
GSDP (%) 37.14 37.41 38.18 37.56 37.07
Revenue Receipts (%) 294.10 344.56 350.77 324.60 283.76
Own Resources (%) 389.00 435.27 442.91 427.11 375.73
Buoyancy of Fiscal Liabilities to
GSDP (ratio) 1.10 1.04 1.21 0.88 0.85
Revenue Receipts (ratio) 1.36 9.39 1.18 0.61 0.34
Own Resources (ratio) 4.12 2.85 1.18 0.77 0.35
4.3.2 Guarantees
Guarantees are liabilities contingent on the Consolidated Fund of the State in case of
default by the borrower. The FRBM Act of State prescribed capping of outstanding guarantees
within the Rs 200 billion limit provided in the Gujarat State Guarantees Act, 1963. The
outstanding guarantees (Rs 124.48 billion) accounted for 40% of the revenue receipts (Rs 310.02
billion) of the State Government and were therefore within the ceiling limit prescribed under the
Act. This percentage has declined to 40% from 109% in 2002-03 while in absolute terms
guarantees have declined by Rs. 645.03 billion from 2002-03 to 2006-07. The State Government
has also set up the Guarantee Redemption Fund to cover contingent liabilities arising out of the
State’s guarantees and the Consolidated Sinking Fund to utilize interest accrued and accumulated
in the fund towards the redemption of outstanding liabilities of the Government.
4.4 Debt Sustainability
Debt sustainability is the ability of the State to maintain a constant debt-GDP ratio over a
span of time; embodies the concern about the State’s ability to service its debt. Sustainability of
debt therefore also implies sufficiency of liquid assets to meet current or committed obligations
and the capacity to balance costs of additional borrowings with returns from such borrowings.

15. I-D: 000796781 Basu 14
Thus, rise in fiscal deficit should match increase in debt servicing capacity of the State. A prior
condition for debt sustainability is debt stabilization defined by the debt/GSDP ratio.
4.4.1 Debt Stabilization
A necessary condition for stability is that if the rate of growth of economy exceeds the
interest rate or cost of public borrowings, the debt-GSDP ratio is likely to be stable provided
primary balances are either zero or positive or are moderately negative. Given the rate spread
(GSDP growth rate–interest rate) and quantum spread (Debt x rate spread), debt sustainability if
quantum spread together with primary deficit is zero, debt-GSDP ratio would be constant and
debt would eventually stabilize. On the other hand, if primary deficit together with quantum
spread were negative, debt-GSDP ratio would rise; in case it is positive, debt-GSDP ratio would
eventually decline. The quantum spread together with primary deficit during 2001-07 was
positive except in 2001-02 and 2004-05 and indicates a constant or sustainable debt–GSDP ratio.
The fiscal liabilities to GSDP ratio which remained stagnant at around 37% from 2002-07
exceeded the positive quantum spread; this indicated sustainable position. The positive sum of
quantum spread and primary deficit as well as declining fiscal deficit led to a decline in fiscal
liabilities to GSDP ratio in 2005-06 and 2006-07.
4.4.2 Sufficiency of Non-debt Receipts
Adequacy of incremental non-debt receipts of the State to cover the incremental interest
liabilities and incremental primary expenditure is another indicator for debt stability and its
sustainability. Debt sustainability would significantly improve if incremental non-debt receipts
meet the incremental interest burden and the incremental primary expenditure. The positive
resource gap between 2001-03 turned negative during 2003-04 but turned positive again in 2004-
07 indicating signs of improvement.
4.4.3 Net Availability of Borrowed Funds
Another important indicator of debt sustainability is the net availability of funds after the
payment of the principal on previously contracted liabilities and interest. From its peak in 2003-
04, internal debt receipts have declined by 44.57% in 2006-07. Loan receipts from Government
of India have also declined by 77.62% in 2006-07 from 2002-03. However, net funds available
from borrowed funds, after providing for the interest and repayment, declined sharply from

16. I-D: 000796781 Basu 15
16.21% in 2005-06 to negative net availability in 2006-07. The State Government did not raise
any market loan in 2006-07. As on March 31 2007, 22% of the existing market loans of the State
Government carried interest rates exceeding 10%, i.e. beyond current market rates. However,
there has a decline of about 4.5% in the
cost of debt as shown in the graph below.
Thus, the effective cost of borrowings on
the past loans was much higher than the
rate at which the State was able to raise
resources at present from the market.
4.5 Deficit Management
The deficit in Government
accounts represents the gap between its
receipts and expenditure. The nature of deficit is an indicator of prudent fiscal management of
the Government. Financing of deficit, raising and applying resources are important pointers to
the State’s fiscal health.
4.5.1 Deficit Trends
The revenue surplus of the State indicates the excess of its revenue receipts over revenue
expenditure stood at Rs 17.70 billion in 2006-07, up from (-) Rs.35.65 billion in 2002-03 – an
improvement of Rs. 53.35
Fig. 10: Fiscal Imbalance Ratios 2002-03 to 2006-07
billion. The fiscal deficit
60 0
50 declined by 6.03% in 2006-
40 -1
07 over 2002-03 while the
30 -2 primary deficit declined by
Percentage
20
10 -3 55.7% at current prices
0 from 2002-03 and turned
-10 -4
into a primary surplus in
-20 -5
-30 2006-07. The ratio of
-40 -6 revenue deficit to GSDP
Fiscal Year
Rev Def/GSDP Prim Def/GSDP
declined from 5.45% in
Rev Def/Fisc Def Fisc Def/GSDP 2001-02 to 0.18 per cent in

17. I-D: 000796781 Basu 16
2005-06. The turnaround in revenue account in 2006-07 was mainly because of an increase of
23.7% in revenue receipts, against an increase of 14.8% in revenue expenditure. Primary revenue
deficit is the gap between non-interest revenue expenditure of the state and its non-debt receipts.
It indicates the ability of non-debt receipts of the State to meet primary expenditure incurred
under revenue account. The primary deficit, which continued in the State, turned into a primary
surplus in 2006-07 because of a moderate decline in fiscal deficit and an increase in interest
payments. Fig. 10 shows the fiscal imbalance of revenue, fiscal and primary deficits to GSDP
and revenue to fiscal deficit.
4.5.2 Quality of Deficit/Surplus
The ratio of revenue deficit (RD) to fiscal deficit (FD) and the breakdown of primary
deficit into primary revenue deficit and capital expenditure (including loans and advances) is
indicative of the quality of deficit in State finances. The RD/FD ratio that indicates the extent of
usage of borrowed funds for current consumption sharply declined from 59.13% in 2002-03 to 6
per cent in 2005-06 expanding the asset base of the State. From 2001-2007 the primary deficit
was because of capital expenditure incurred and loans and advances disbursed by the State
Government. In other words, non-debt receipts of the State were enough to meet the primary
expenditure requirements in the revenue account; left some residuary receipts to meet
expenditure under capital account. However, the State had to borrow to meet capital account
requirements from 2001-06 which is desirable to improve the productive capacity of the State’s
economy. The State’s fiscal deficit owed to interest payments of Rs 69.32 billion in 2006-07 - a
substantial improvement from (-) Rs. 23.05 billion in 2002-03.
4.6 Fiscal Ratios
The finances of a State need to be sustainable, flexible and relatively less vulnerable. Table 2
presents a summarized position of Government finances over 2002-07, with reference to certain
key indicators that help to assess the adequacy and effectiveness of available resources and their
applications, highlights areas of concern and captures its important facts. The ratio of revenue
receipts and State’s own taxes to GSDP indicate the State is increasing access to resources and
the nature of the tax regime. Revenue receipts comprise not only tax and non-tax resources of the
State but also the transfers from the Central Government.

18. I-D: 000796781 Basu 17
The ratio of revenue receipts to GSDP in 2006-07 was 13 per cent, an increase of 0.37%
since 2002-03. During 2002-07, the ratio of the State’s own taxes to GSDP increased by 1.05%.
Revenue expenditure to total expenditure declined by 10.81% while capital expenditure to total
expenditure rose by 11.25% while total expenditure to revenue receipts declined by 14.18%.
Thus, increasing reliance on revenue receipts to finance total expenditure (83% in 2006-07)
indicated decreasing dependence on borrowed funds. Decreasing ratio of financial liabilities to
revenue receipts also reflects this trend.
The ratio of salary and wages to revenue expenditure on social and economic services
continuously declined from 2002-07 while non-salary remained little more than half during the
same period; indicated better quality of expenditure and improvement in social and economic
services. The improving balance of current revenue of the State improved continuously during
2001-07 and large huge surpluses in 2005-06 and 2006-07 indicated more availability of funds
for additional infrastructure support and other revenue generating investments. Continuing
improvement in revenue account, declining fiscal deficit and increasing share of capital
expenditure in total expenditure of the government have resulted in the improvement in the ratio
of assets to liabilities from 0.55 in 2002-03 to 0.66 in 2006-07. However, low returns of 0.27 in
2003-04 to 1.92% in 2006-07 remain a major concern for the State.
5. Externally Aided Projects (EAP)
From Apr 1 2005, the Central Government (Principal Borrower) transfers external aid to
the State on the same terms and conditions on which it has availed such assistance. Normally,
rate of interest of such external assistance links to current LIBOR rates. Presently, the State has
five ongoing EAPs for Rs. 42.20 billion in various sectors sanctioned by various multilateral and
bi-lateral agencies such as the World Bank, Japanese Bank for International Cooperation (JBIC)
and the Asian Development Bank (ADB). Of the five EAPs, one is for earthquake rehabilitation
and reconstruction program while four are for Road, Technical Education, Water Resources and
Forestry sectors.
6. Foreign Investment
The economic survey for 2007-08 fiscal of the state government says it has received investments
worth Rs 4529.83 billion between 1991 and 2007. This investment does not involve
commitments made through memorandum of understanding. This investment has come through

19. I-D: 000796781 Basu 18
routes like the industrial entrepreneur memorandum (IEM), letter of intent, and 100% export
oriented units. Gujarat has fetched an investment of Rs 4528.3 billion on 9440 proposals, The
closest competitor, the adjoining state of Maharashtra, clocked Rs 3891.90 billion spread over
14,069 proposals.
Table 2
(Figures in percentage unless specified in row)
Fiscal Indicators 2002-03 2003-04 2004-05 2005-06 2006-07
I Resources Mobilization
Revenue Receipt/GSDP 12.63 10.86 10.88 11.57 13.06
Revenue Buoyancy 0.81 0.11 1.03 1.45 2.48
Own Tax/GSDP 6.73 6.65 6..96 7.25 7.78
II Expenditure Management
Total Expenditure/GSDP 17.05 16.41 15.65 15.29 15.78
Total Expenditure/Revenue Receipts 134.98 151.19 143.80 132.15 120.80
Revenue Expenditure/Total Expenditure 88.86 79.57 83.39 76.87 78.05
Salary &Wage expenditure on Social and Economic
Services / Revenue Expenditure 7.69 7.44 7.04 6.86 4.75
Non-Salary &Wage expenditure on Social and 53.10 49.97 51.12 48.39
53.33
Economic Services / Revenue Expenditure
Capital Expenditure/Total Expenditure 9.70 11.64 14.07 21.01 20.95
Capital Expenditure on Social and Economic
Services/Total Expenditure 9.55 11.43 13.78 20.74 20.78
Buoyancy of TE with RR (-) 0.20 6.88 0.51 0.58 0.55
Buoyancy of RE with RR (-) 0.48 1.15 0.97 0.20 0.62
III Management of Fiscal Imbalances
Revenue deficit (Rs in Billion) 35.65 37.06 40.37 3.98 +1770
Fiscal deficit (Rs in Billion) 60.29 91.42 86.91 62.68 56.48
Primary Deficit (Rs in Billion) 10.80 32.67 26.12 1.25 +1284
Revenue Deficit/Fiscal Deficit 59.13 40.54 46.45 6.35 +31.34
IV Management of Fiscal Liabilities
Fiscal Liabilities/GSDP 37.14 37.41 38.18 37.56 37.07
Fiscal Liabilities/RR 294.10 344.56 350.77 324.60 283.76
Buoyancy of FL with RR 1.36 9.39 1.18 0.61 0.34
Buoyancy of FL with Own Resources 4.12 2.85 1.18 0.77 0.35
Primary deficit vis-à-vis quantum spread 0.54 0.72 2.46 0.02 1.18
Net Funds Available 14.54 14.23 11.21 16.21 - 1.48
V Other Fiscal Health Indicators
Return on Investment 0.84 0.27 0.28 0.92 1.92
Balance from Current Revenue (Billions of Rupees) - 237 - 177.1 - 97.7 283.3 646.1
Financial Assets/Liabilities 0.55 0.56 0.56 0.61 0.66