Fiscal Priorities for Sikkim

SARTHAK PRADHAN

In a recent speech, Chief Minister of Sikkim, Prem Singh Tamang (Golay) announced the integration of more developmental projects in the upcoming budget. The successful execution of public projects and the effective implementation of government policies are contingent on the state's healthy fiscal situation. As the Sikkim Government prepares to present the budget, here is a look at the state's financial situation.

Revenue

The total revenue (Revenue Receipts - RR) of any state in India consists of the revenues that the state raises on its own and the revenues that the union transfers to the state. The state raises its revenue through taxes like on sales, trade, vehicles, excise etc. and non-taxes like interest receipts on loans, departmental receipts for government services, etc. The union transfers consist of grants and the state's share in union taxes (e.g. income tax) as the Finance Commission decides.

Sikkim's own revenue and total revenue increased yearly at 8.34% and 8.26% CAGR, respectively, between 2014-2023. But these growths have not been consistent. For instance, the state's total revenue declined in 2015-16 and 2019-20. Thus, in the above financial years, Sikkim had lesser resources than the previous year to meet its requirements. Alarming, isn't it?

Another way to evaluate the revenue receipts of a state is by comparing it with its Gross State Domestic Product (GSDP). A high revenue receipt to GSDP ratio (RR/GSDP) indicates the greater capacity of the state to mobilise revenues. However, for Sikkim, the ratio tends to be low and has declined between 2014-15 to 2022-23 (Budget Estimates - BE) from 29.3% to 20% (Figure 1). The 2022-23 BE is also lower than the 2021-22 Revised Estimates (RE). Sikkim needs to reverse this trend and increase its revenue receipts. A CAG state finances audit report has also recommended the same..

Dependence on the Union Government

Apart from this, it is worth noting that the state is heavily dependent on the union for its revenue requirements, with the union transfers accounting for more than two-thirds of Sikkim's total revenue (Figure 2). Sikkim's weak revenue mobilisation capacity can be attributed to its geographic and economic limitations. The split between Sikkim’s own revenue and union transfers has fluctuated in recent times (Figure 2). Since 2014-15, the state's own revenue share has ranged between 21% (2021-22 RE) and 35% (2019-20). The 2022-23 BE expects the state-union split to be around 28:72. If the state's own revenue share grows consistently, it will imply the state's decreasing dependence on the union. It can improve financial predictability for the state and give it higher flexibility to invest in forward-looking initiatives. It will also protect it to a large degree from the policy changes happening at the union level.

Own Tax Revenue (OTR)

A significant component of a state's own revenue comes from the taxes it collects from commodities & services, property & capital transactions and income (agriculture, trade, professions etc.). The OTR to GSDP ratio indicates how well the state mobilises its taxes. Sikkim's OTR-GSDP ratio (3.2%, 2022-23 BE) tends to be lower than the All States ratio (6.9%, 2022-23 BE) and is lowest among North Eastern and Himalayan states (Figure 3). What is alarming is the ratio has decreased over time, from 3.5% in 2014-15 to 3.2% in 2022-23 BE. In recent years, it was highest at 4% in 2017-18 (Figure 4). Sikkim must take measures to improve its tax capacity. Higher tax capacity will provide Sikkim with a stable source of income to finance its activities.

Own Non-Tax Revenue (ONTR)

The other significant component of the state's own revenue is the non-tax revenues (ONTR) i.e. interest receipts, departmental receipts etc. Sikkim's ONTR/GSDP ratio (2.4%, 2022-23 BE) is better than the All States' average (1.3%, 2022-23 BE). But it has declined between 2014-15 (4.6%) and 2022-23 BE (2.4%). (Figure 4) Sikkim must arrest the decline.

Committed Expenditure

A state has some payment obligations (committed expenditures like salaries and pensions, interest payments) that have the first charge on government resources. Sikkim's payment obligations as a proportion of its revenue receipts and expenditure have grown rapidly. The CAG report points out that Sikkim's committed expenditure to revenue receipts ratio increased from 61.5% in 2015-16 to 93.72% in 2019-20. Salaries and wages account for 64.38% of the total revenue receipts. Such high levels of committed expenditure severely limit the state's capacity to spend on other social and economic services. Developmental activities get compromised. Sikkim must initiate reforms to rationalise its committed expenditure.

Fiscal Management

The debt-GSDP ratio of Sikkim has breached the targets set under the FRBM Act. While the Finance Commission's prescribed level is 28.1%, it now stands at 44.1%, almost double what it was in 2014-15 (22.6%) (Figure 5). Another way to interpret this - the debt has grown way faster than the state's economy. Such high levels of debt is unsustainable in the long run. It implies greater obligations on future generations to pay off the debt. It reduces flexibility to incur development expenditure.  The state must improve revenue mobilisation to reduce its debt burden and keep it at sustainable levels.

Let’s hope the state prioritises the above to improve its fiscal health in the upcoming state budget.

(Sarthak Pradhan is an Assistant Professor at the Takshashila Institution. The research for this article was made possible by The International Centre Goa Research Grants (ICGRG). Email: sarthak@takshashila.org.in)