Evaluation of State Finances of Uttar Pradesh (Final Report) June, 2019 Sponsored by Fifteenth Finance Commission, Government of India, New Delhi By Nagendra Kumar Maurya Assistant Professor Department of Applied Economics, University of Lucknow, Lucknow-226007 Uttar Pradesh (India) Preface The present study provides a critical evaluation of state finances of Uttar Pradesh covering the period of 2005-06 to 2015-16. The study is sponsored by the Fifteenth Finance Commission, Government of India with given terms of reference. The study is based on secondary data taken from Reserve Bank of India, Uttar Pradesh Budget Documents, CAG reports, Bureau of Public Enterprises and Annual Reports of UPPCL. However, the quality of analysis and discussion is constrained by the availability of data. Due to general assembly elections, most of the administrative officers were busy, and despite of our several efforts, they could not be contacted for discussion on the various aspects of state finances. Therefore, information regarding policy measures taken by the government to enhance revenue capacity, allocative and technical efficiency of public expenditure; problems and prospects of GST in the state could have been presented in more analytical way. SPSU wise data could also not be collected due to the same reason. The whole report is divided into eleven chapters. Chapter I discusses the state of social and economic progress of Uttar Pradesh. Chapter II gives a detail account of estimation of revenue capacities of State and measures to improve the tax-GDP ratio and suggestions for enhancing the revenue productivity of the tax system in the State. Analysis of the state‟s own non- tax revenue along with suggestion to enhance revenues from user charges and profits from departmental enterprises and dividends from non- departmental commercial enterprises has also been discussed in the chapter II. Expenditure pattern and trends separately for revenue and capital, major components of expenditure there under, measures to enhance allocative and technical efficiency in expenditures and suggestions for improving efficiency in public spending are discussed in the chapter III. Chapter IV i talks about the analysis of deficits - fiscal and revenue in detail along with the discussion on the level of debt/GSDP ratio and the use of debt. This chapter also incorporates the study of composition of the state‟s debt in terms of market borrowing, central government debt (including those from bilateral/multilateral lending agencies routed through the Central government), liabilities in public account (small savings, provident funds etc) and borrowings from agencies such as NABARD, LIC etc. Analysis of contingent liabilities of the State has also been made in the chapter. Implementation of FRBM Act and commitment towards targets as well as analysis of MTFP of various departments has been presented in the chapter V. Analysis of the state‟s transfers to urban and rural local bodies in the State and major decentralization initiatives have been discussed in chapter VI. Impact of State Public Enterprises finances on the State‟s financial health and measures taken to improve their performance and/or alternatives of closure, disinvestment etc. is given in chapter VII. Chapter VIII covers the analysis of the impact of power sector reforms on state‟s fiscal health, in case reforms have not been implemented, the likely outcome on the state‟s fiscal health. Measurement of subsidies given by the state (Other than Central subsidies), its targeting and evaluation has been made in chapter IX. Chapter X discusses the status of GST in the state and chapter XI includes major conclusions and suggestions of the study. I also take this opportunity to express our sincere thanks to various persons for their help in the conduct of this study. First and foremost, I am grateful to the Fifteenth Finance Commission for selecting the University of Lucknow to conduct the study and providing generous financial support for the same. I am especially indebted to Prof. N R Bhanumurthy, NIPFP, New Delhi for recommending my name to the Commission for undertaking the said study. I am also thankful to the Prof. S P Singh, Hon‟ble Vice Chancellor, Lucknow ii University for providing all administrative help in completing the study. Thanks are also due to the head of the department of applied economics Prof. R K Maheshwari for giving me all possible academic and administrative help to complete the study. I am also thankful to Prof. S K Shukla, Dean, Faculty of Commerce, University of Lucknow, for his support and guidance. I also would like to acknowledge our faculty members and administrative staff of the University for facilitating the research work. My special thanks to Dr. Karuna Shanker Kanaujiya for providing his unconditional assistance and support in carrying out the study. I am also happy to express my thanks to Shri Ravi Kumar, who has worked as Research Assistant in this study and helped in procuring and processing the data. Finally, I am sincerely grateful to my wife Ms. Anuradha for giving me enough space from family responsibilities to finish up the work on time. Date: 5th June, 2019 Place: Lucknow (Nagendra Kumar Maurya) iii Executive Summary The present study provides a critical evaluation of state finances of Uttar Pradesh covering the period of 2005-06 to 2015-16. The study is sponsored by the Fifteenth Finance Commission, Government of India with given terms of reference. The study is based on secondary data taken from Reserve Bank of India publications, Uttar Pradesh Budget Documents, CAG reports, Bureau of Public Enterprises and Annual Reports of UPPCL. However, the quality of analysis and discussion is constrained by the availability of data. State of the Economy of Uttar Pradesh Uttar Pradesh (UP) is characterized as the most economically backward state after Bihar. It is also the most populous state of the country. As per Census 2011, the population of Uttar Pradesh is 19.98 crore with a decennial growth of 20.09 percent. UP has added more than 33.6 million to the total population of the country in the last decade, the most by any state, recording an annual growth of 20.09 percent. However, the corresponding figure of growth for the previous decade (1991-2001) was 25.61 percent, thereby, displaying a decline of more than five percent which is quite significant. The growth performance of the state during five years plan shows that it was the XI Five Year Plan (2007-12) which recorded the highest growth rate in NDP and per capita income. UP‟s Per capita income (2016-17: Rs. 39028) is the second lowest in the country after Bihar. The state‟s per capita income is half of the national level figure. The main reasons for the low growth in the state are slow structural transformation along with low capital investment. One third of the total state‟s product comes from agriculture and allied activities whereas services contribute around half of the total. The major cause of concern is the sluggish growth of the industrial sector. The process of structural shifts in employment is slow. About 50 percent of the iv total direct employment is still in agriculture sector. In recent years, the construction sector has emerged as the fastest growing activity under the industrial sector along with creating large employment opportunities. Employment share of construction sector grew six times from 2.34 percent in 1993-94 to 13.62 percent in 2011-12. For the corresponding period, employment in manufacturing rose from 10.05 percent to 13.18 percent which is not very encouraging. The state had a higher incidence of poverty as compared to the country. Although, substantial decline has been registered in the case of overall poverty (by 11.5 percent) during 2004-05 to 2011-12 and however, the rural poverty (a change of 25.38 percent), is still very high i.e. 29.4 percent in 2011-12. To sum-up, Uttar Pradesh is lagging behind in terms of indicators of economic and social development. The pace of economic progress and structural changes is inadequate to break the low equilibrium trap. Rising unemployment, high rural and urban poverty and low economic well being will definitely have downward pressure on state finances especially in terms of high expenditure needs and low revenue capacity. Trends in Tax and Non-tax revenue in Uttar Pradesh Own tax revenue has gone up to Rs. 81106.29 crores from Rs. 18857.9 crores during 2005-06 and 2015-16 which is a more than fourfold rise. Similar increment has also been registered in different component of state‟s own tax revenue viz. taxes on income, taxes on property & capital transactions and taxes on commodities & services. State sales tax, state excise duty, stamps & registration fees and taxes on vehicles are the main contributors of own tax revenues. These four sources contribute more than 75 percent of total own tax revenue collections. There has not been much changes in the composition of own tax revenue during the given time period. v Tax buoyancy for the whole period can be referred to be buoyant as its value (1.153) is more than one. The tax/GSDP ratio is rising continuously. It has increased from 6.09 per cent to 7.24 percent during 2005-06 to 2015- 16 which corroborate the findings of high tax buoyancy. Rising own tax revenue/GSDP ratio indicates increase in tax efforts. The possible solutions to the low taxable capacity of the state lie in a multi-pronged approach which not only addresses the tax effort of the state but also focuses on the issues like governance, accountability, expenditure efficiency, etc. State‟s own non-tax revenues rose from Rs.