when P Chidambaram stood up to present the first full-fledged United Progressive Alliance (upa) budget on February 28, 2005, it was his second opportunity to show words were backed with resources. Interestingly, the finance minister has not only increased expenditure on various development and social sector programmes, and reduced taxes, he also has cut the fiscal deficit from 4.5 per cent to 4.3 per cent. Magic. How has this been done? Chidambaram assumes 21 per cent higher tax revenues. He's cut lending to states: there's a Rs 29,003 crore gap in plan expenditure states have to fill. This cut, in Central loans to states, is in line with recommendations the Twelfth Finance Commission (tfc), a constitutional body set up to decide allocation between Centre and states every five years, made.
The issue is: does this place an additional burden on states to raise loans from the market? Yes, and no. S tates will now have to borrow directly from the market; the pressure is on them. The burden will be particularly higher on the less creditworthy states, also usually the poorer ones. On the other hand, however, tfc also recommends an increase in the share of the Centre's revenues to be shared with states, from 29.5 per cent at present to 30.5 per cent. In 2005-06, states can expect Rs 94,959 crore. This places about Rs 3,000 crores more than last year at the disposal of the states. The Centre has also rescheduled state loans outstanding to it, as on March 31, 2005. This, too, puts additional money in the hands of a state. The combined impact of these two changes actually reduces the immediate burden on states to raise money from the market.
Plan expenditure The money to be spent on implementing plan programmes in 2005-2006