Something, to misquote the prince of Denmark, is strange in the state of Odisha. While chief minister Naveen Patnaik is seeking '4,59,839 crore from the newly constituted 14th finance commission for 2015-20 and making an aggressive pitch for greater fiscal autonomy and special status for Odisha, finance minister Prasanna Acharya is going ga-ga over the size of the state’s wallet.

If Odisha is flush with funds as Acharya claims, then why is it considered a “backward state” and why the demand for special category?

Odisha, Acharya says, has achieved a turnaround in the last decade under Patnaik’s stewardship. As an example, he says Odisha was a revenue-deficit state in 1999-2000 with its revenues pegged at only '2,420 crore. This, he says, has increased nine-fold to '23,112 crore as of last financial year.

The turnaround tale…

According to Acharya, this is a remarkable achievement, especially considering the decline in the central share towards the state. In 1999-2000 the share of central transfer in total revenue received by the state was 59% and its own resource was 41%. Now the scenario is the opposite, with the state’s total revenue at 52.60% in 2012-2013, he says – and this at a time when states like Bihar are depending more on central government funds, which is “about 70%”.

Since 2005-06, he says, there have been consistent efforts to improve the state’s financial condition. The result? Odisha, according to Acharya, is now a revenue-surplus state with zero deficit. In contrast, in 1999-2000 revenue deficit was '2,574 crore, or 5.38% above Odisha’s gross state domestic product (GSDP).

According to the Fiscal Responsibility and Budget Management (FRBM) Act, the fiscal deficit should be within 3% of GSDP. In 1999-2000 the fiscal deficit was 8.01% of GSDP, now it is below 3%. Acharya says that due to this surplus the state was able to invest in infrastructure works like roads and buildings through capital expenditure.

The finance department, Acharya says, is managing the fund surplus by adhering to FRBM Act and has been able to control revenue expenditure and increase tax and non-tax revenue collection. The finance department has reduced the debt burden since 2005-06 and the state has stopped borrowing from the market. He says the debt servicing cost has been reduced and per capita debt has been reduced to '10,000 – 22 states have higher debt burden than Odisha.

Acharya says capital outlay in 1999-2000 was '799 crore, while this has gone up to '7,840 crore in the current fiscal. Similarly, the state plan size was '2,484 crore in 1999-2000, which has gone up to '21,477 crore. In supplementary budget this year, the finance minister has proposed another '7,000 crore. Acharya says his department has succeeded in evolving schemes such as Biju KBK Yojana, Gopabandhu Gramin Yojana, Madhu Babu Pension Scheme and Harishchandra Yojana from its own resources.

…Or is it a bit of fiction?

Despite the uber-positive assessment of the state’s finance minister, however, the comptroller and auditor general of India’s (CAG) report for 2012-13 red-flagged the state government. The report indicates that capital expenditure remained stagnant at 2% in 2012-13. The state government has not been able to spend 25% of the budget expenditure, the report states, and nothing has been done to induce growth, which could have had a multiplier effect on the state’s economy.

The CAG report says while Odisha has revenue surplus of '4,500 crore, its capital expenditure is the lowest in India. It says budget papers presented by the state government indicate that it has not concentrated on other important issues except social expenditure. The surplus fund used is very less compared to many other states.

According to the report, health has been a neglected sector and nothing has been done to spur growth. While agriculture growth was recorded at 17.5%, industry grew at 25% and the rest is service sector, Amar Patnaik, accountant general of Odisha, says.

According to the CAG, infrastructure development has been neglected by the state, while the state does have the institutional capacity to spend at the lower level. Sample this: Andhra Pradesh has spent '15,000 crore, whereas Odisha could spend only '3,000 crore. Reason: there has been no recruitment at junior level since 2011.

Rubbishing Acharya’s claims of revenue surplus, the leader of opposition in the assembly, Bhupinder Singh of the Congress, says this should be judged by capital expenditure – the real parameter of sound finances. He says the Congress has time and again sought creation of assets by the state government and he has repeatedly harped on this in the assembly.

According to Singh, the state government does not have the capacity to spend plan money due to lack of manpower. The government has deposited around '6,000 crore in bank and is sitting on a pile of cash without investing it, and thereby affecting the state’s growth, the Congress MLA alleges. There are 2.50 lakh jobs lying vacant in the state and a sizeable budget can be spent to provide jobs by using this money, Singh says.

The case for central assistance, and the opposition

Acharya on his part admits that despite economic progress the state has to go a long way to achieve the national average in many sectors. This, he says, is because Odisha has historically been a neglected state and its pace of development is much lower than the national average.

According to him, Odisha requires special treatment from the union government to reach the level of more developed states but that help has been lacking. He also alleges that such decisions (on central aid) are taken more as political consideration than on economic requirements.

Accusing the UPA government of neglecting Odisha, Acharya maintains that the main reason why Odisha’s legitimate claim for special status has been overlooked by the centre is that the BJD is governing the state for the last 15 years: “If development and economic decisions are guided by politics it will bring disaster.”

But refuting Acharya’s allegations as “baseless”, Congress’s Singh points out that the UPA government gives around '7,000 crore to '8,000 crore for schemes such as the national rural health mission (NRHM) and pradhan mantri gram sadak yojana (PMGSY), among others, but the state government is unable to utilise the funds.

He claims that unutilised MNREGA funds are returned to the centre every year and that the BJD government in the state is unable to provide even 100 days of work to 10 to 15 percent job cardholders. That aside, there is nearly 60 percent vacancy in the health sector as doctors get little work incentive.

It may be mentioned that Odisha was a finance-deficit state when the BJD assumed charge, prompting the party’s reforms agenda to change the scenario. The government started earning revenue once it was implemented and has not changed the path since. But this, experts say, had such a negative impact that the government has not been able to avail the 13th finance commission’s grant of '688 crore meant for establishing market yards, education, health etc.

What CAG says

According to CAG, the importance of accuracy in estimation of revenue and expenditure is widely accepted in the context of effective implementation of fiscal policies for overall economic management. Deviations from budget estimates are indicative of non-allotment and non-optimisation of desired objectives. Compared to budget estimates for 2011-12 there was considerable variation in actuals in the case of key fiscal parameters, the report says.

The CAG report shows that Odisha’s actual revenue receipts were more than the budget estimates by '3,884 crore, which is 11%, mainly due to increase in non-tax revenue receipts. The state’s own tax revenue was more than the budget estimates by '1,137 crore (9%). As a result, the estimated revenue surplus of only '60 crore turned into revenue surplus of '5,607 crore.

Revenue and capital expenditure were less than the budget estimate by '1,663 crore and '1,166 crore, respectively.

The report indicates asset creation was not given as much priority as intended due to 21% shortfall in capital expenditure over the budget estimate. This decrease in capital expenditure as compared to budget is not a good sign in a developing state with poor infrastructure, the report says. However, fiscal deficit of '5,989 crore and primary deficit of '1,941 crore estimated in the budget turned into fiscal surplus and primary surplus of '622 crore and '3,198 crore, which is a healthy sign, the CAG says.

The minister claims that the thrust of the finance department is to increase revenue collection and his department has been keeping up the momentum in achieving the target. But the reported income on tax receipts is showing a decline from 20% in 2011-12 to 11.8% in 2013. Even the buoyancy has declined from 2% to 0.5%.

In fact, as the annual growth of revenue receipts has come down from 25.90% in 2011-12 to 21%, Patnaik suggested in his report that the government should mobilise additional resources through tax and non-tax revenue by expanding the tax base and rationalising the user charges.

What experts say

Financial analyst Dhirendra Kumar Roy says fiscal management of the state government is quite inefficient as evident from the fact that while funds are shown as surplus, infrastructure is inadequate and social sector spending is low. There is good potential for raising tax revenue from the mining sector and from goods and services, as indicated by the internal report of the committee headed by Sanjeev Hota, he says.

Now it is a question of priority and Odisha can make efficient use of surplus funds, additional resource mobilisation and even long-term borrowing.

Roy says the government does a lot of jugglery with populist schemes, most of which are financed by central funds. In several schemes the actual expenditure falls far short of financial claims given in the announcement of the schemes. “The state’s finances are in a fairly good shape at present, enabling it to meet the commitments of a few state-sponsored schemes. Low capital expenditure reflects lack of leadership and initiative by the political class – the ministers (primarily); and inefficiency and ineffectiveness of the civil servants and professional executives at various level,” he says.

“Obviously, the top leadership in the government is largely responsible for creating an environment in which caution and inaction is valued by the government and risk taking is not supported or encouraged.”

He says Odisha has not faced the need to borrow from the market because of fiscal consolidation of the last few years on the one hand and failure to make long-term decisions and investments for asset creation on the other. The financial position improved considerably due to buoyancy in the mining sector and expansion of service and realty sectors, Roy says.

Asked how the state expects to raise funds, Acharya maintains that revenue from mining may have gone down but that is only 1 percent of the total receivables. Revenue collection has also gone down in other sectors like transportation, land and forest.

Admitting an adverse impact due to the present economic slowdown nationally, Acharya says despite this the state has been able to keep up its momentum in revenue collection. Compared to last year, revenue collection has increased 13% in the corresponding period up to October 2013, he says.

But Roy says the Odisha government needs to now break free from the strategy adopted during the days of deficit financing in an effort to assess manpower needs of a rapidly developing state and to recruit, train and deploy them in pursuance of creating an enlightened and effective administrative apparatus.

Moreover, the government should initiate suitable measures to reduce non-plan revenue expenditures so that even more funds are available for creation of durable assets through increased capital expenditure, state accountant general Amar Patnaik says. “The government should also phase out implicit subsidies and resort to need-based borrowings to reduce interest payments and contain growth of unproductive non-plan revenue expenditure,” he says.

(This story first appeared in the magazine's January 1-15 edition)