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In recent news reports there have been deliberations on whether there is a possibility of appealing a central government decision on forest clearances.  In this context, the National Green Tribunal (NGT) has directed states to comply with the statutory requirement of passing an order notifying diversion of forest land for non-forest purposes.  It has also held that it can hear appeals from the orders of state governments and other authorities on forest clearances. The NGT was established in 2010 to deal with cases relating to environmental protection, and conservation of forests and other natural resources.  The need was felt to have a mechanism to hear appeals filed by aggrieved citizens against government orders on forest clearances.  For instance, the NGT can hear appeals against an order of the appellate authority, state government or pollution control board under the Water (Prevention and Control of Pollution) Act, 1974. How is a forest clearance obtained? Obtaining a forest clearance is a key step in the process of setting up a project.  Recently the Chhatrasal coal mine allotted to Reliance Power's 4,000 MW Sasan thermal power project in Madhya Pradesh has received forest clearance.  The Ministry of Environment and Forests (MoEF) first gives ‘in-principle’ approval to divert forest land for non-forest purposes based on the recommendations of the Forest Advisory Committee.  This approval is subject to the project developer complying with certain conditions.  Once these conditions are complied with, the central government issues the final clearance.  It is only after this clearance that the state government passes an order notifying the diversion of forest land.  The NGT’s decision deals with this point in the process during which an appeal can be filed against the order of forest clearance.  For the flowchart put out by the MoEF on the procedure for obtaining a forest clearance, see here. What was the NGT’s ruling on forest clearances? The NGT was hearing an appeal against a forest clearance given by the MoEF to divert 61 hectares of forest land for a hydroelectric project by GMR in Uttarakhand.  The NGT has ruled  that it does not have the jurisdiction to hear appeals against forest clearances given to projects by the MoEF.  However, the NGT has the power to hear appeals on an order or decision made by a state government or other authorities under the Forest (Conservation) Act, 1980.  The judgment observed that though Section 2 of the Forest (Conservation) Act, 1980 requires that state governments pass separate orders notifying the diversion of land, this requirement is not being followed.  The NGT has directed that state governments pass a reasoned order notifying the diversion of the forest land for non-forest purposes, immediately after the central government has given its clearance.  This will allow aggrieved citizens to challenge the forest clearance of a project after the state government has passed an order.  Additionally, the NGT has also directed the MoEF to issue a notification streamlining the procedure to be adopted by state governments and other authorities for passing orders granting forest clearance under section 2 of the Forest (Conservation) Act, 1980. There are some concerns that an appeal to the NGT can only be made after the state government has passed an order notifying the diversion of forest land and significant resources have been invested in the project. What is the status of applications for forest clearances made to the MoEF? The MoEF has given approval to 1126 proposals that involve the diversion of 15,639 hectares of forest land from July 13, 2011 to July 12, 2012.  The category of projects accorded the most number of approvals was road projects (308) followed by transmission lines (137).  Some of the other categories of projects that received clearance for a significant number of projects were mining, hydel and irrigation projects.  However, most land was diverted for mining related projects i.e., 40% of the total forest land diverted in this period.  Figure 1 shows a break up of the extent of forest land diverted for various categories of projects.  The number of forest clearances pending for decision by the MoEF for applications made in the years 2012, 2011 and 2010 are 197, 129 and 48 respectively. [i]

Source: “Environmental Clearance accorded from 13.07.2011 to 12.07.2012”, October 12, 2012, MoEF.

 

  [1] MoEF,  Rajya Sabha, Unstarred Question no. 2520, September 4, 2012

Early this week, the Comptroller and Auditor General (CAG) of India tabled a report on the finances of Uttar Pradesh for the financial year 2020-21.  A few days prior to that, on May 26, the budget for Uttar Pradesh for 2022-23 was presented, along with which the final audited expenditure and receipt figures for the year 2020-21 were released.  The year 2020-21 presented a two-fold challenge for states – loss in revenue due to impact of COVID-19 pandemic and lockdown, and the need for increased expenditure to support affected persons and economic recovery.  CAG noted that Uttar Pradesh’s GSDP grew by 1.05% in 2020-21 as compared to a growth of 6.5% in 2019-20.  The state reported a revenue deficit of Rs 2,367 crore in 2020-21 after reporting revenue surplus for 14 successive years since 2006-07.  Revenue deficit is the excess of revenue expenditure over revenue receipts.  This blog looks at the key trends in the finances of Uttar Pradesh in 2020-21 and certain observations by CAG on fiscal management by the state.

Spending and Deficits in 2020-21

Underspending:  In 2020-21, total spending by the state was 26% less than the budget estimate presented in February 2020.  In sectors such as water supply and sanitation, the actual expenditure was 60% less than the amount budgeted, while in agriculture and allied activities only 53% of the budgeted amount was spent.  CAG observed that in 251 schemes across 57 departments, the state government did not incur any expenditure in 2020-21.  These schemes had a budget provision of at least one crore rupees, and had cumulative allocation of Rs 50,617 crore.  These included schemes such as Pipe Drinking Water Scheme in Bundelkhand/Vindhya and apportionment of pension liabilities.  Moreover, the overall savings due to non-utilisation of funds in 2020-21 was 27.28% of total budget provisions.  CAG observed that the budgetary provisions increased between 2016 and 2021.  However, the utilisation of budget provisions reduced between 2018-19 and 2020-21.

Pattern of spending: CAG observed that in case of 12 departments, more than 50% of the expenditure was incurred in March 2021, the last month of the financial year.  In the civil aviation department, 89% of the total expenditure was incurred in March while this figure was 62% for the social welfare department (welfare of handicapped and backward classes).  CAG noted that maintaining a steady pace of expenditure is a sound practice under public financial management.  However, the Uttar Pradesh Budget Manual has no specific instructions for preventing such bunching of expenditure.  The CAG recommended that the state government can consider issuing guidelines to control the rush of expenditure towards the closing months of the financial year.

Management of deficit and debt: As a measure to mitigate the impact of COVID-19, an Ordinance was promulgated in June 2020 to raise the fiscal deficit limit from 3% of GSDP to 5% of GSDP for the year 2020-21.   Fiscal deficit represents the gap between expenditure and receipts in a year, and this gap is filled with borrowings.   The Uttar Pradesh Fiscal Responsibility and Budget Management Act, 2004 (FRBM Act) passed by Uttar Pradesh Assembly specifies the upper limit for debt and deficits.  The Ordinance thus permitted the state government to borrow more to sustain its budget expenditure.  The fiscal deficit of the state in 2020-21 was 3.20% of GSDP, well below the revised limit. At the same time, the state’s outstanding debt to GSDP in 2020-21 was 32.77% of GSDP, above the target of 32% of GSDP set under the FRBM Act.  Outstanding debt represents accumulation of debt over the years.  

Table 1: Spending by Uttar Pradesh in 2020-21 as compared to Budget Estimates (in Rs crore)

Particular

2020-21 BE

2020-21 Actuals

% change from BE to Actuals

Net Receipts (1+2)

4,24,767

2,97,311

-30%

1. Revenue Receipts (a+b+c+d)

4,22,567

2,96,176

-30%

a. Own Tax Revenue

1,58,413

1,19,897

-24%

b. Own Non-Tax Revenue

31,179

11,846

-62%

c. Share in central taxes

1,52,863

1,06,687

-30%

d. Grants-in-aid from the Centre

80,112

57,746

-28%

Of which GST compensation grants

7,608

9,381

23%

2. Non-Debt Capital Receipts

2,200

1,135

-48%

3. Borrowings

75,791

86,859

15%

Of which GST compensation loan

-

6,007

-

Net Expenditure (4+5+6)

4,77,963

3,51,933

-26%

4. Revenue Expenditure

3,95,117

2,98,543

-24%

5. Capital Outlay

81,209

52,237

-36%

6. Loans and Advances

1,637

1,153

-30%

7. Debt Repayment

34,897

26,777

-23%

Revenue Balance

27,451

-2,367

-109%

Revenue Balance (as % of GSDP)

1.53%

-0.14%

 

Fiscal Deficit

53,195

54,622

3%

Fiscal Deficit (as % of GSDP)

2.97%

3.20%

 

Note: A negative revenue balance indicates a deficit.  The actual fiscal deficit reported by Uttar Pradesh for 2020-21 in 2022-23 budget was 2.8% of GSDP.  This difference was due to higher GSDP figure reported by the state.  
Sources: Uttar Pradesh Budget Documents of various years; CAG; PRS.

Finances of State Public Sector Undertakings

Public sector undertakings (PSUs) are set up by the government to discharge commercial activities in various sectors.  As on March 31, 2021, there were 115 PSUs in Uttar Pradesh.  CAG analysed the performance of 38 PSUs.   Out of these 38 PSUs, 22 companies earned a profit of Rs 700 crore, while 16 companies posted a loss of Rs 7,411 crore in 2020-21.  Note that both the number of PSUs incurring losses and the quantum of losses has decreased since 2018-19.  In 2018-19, 20 PSUs had reported losses worth Rs 15,219 crore.  

Figure 1: Cumulative losses incurred by Uttar Pradesh PSUs (Rs crore)
 
 image
 Sources: CAG; PRS.

Losses of power sector PSUs: Three power sector PSUs—Uttar Pradesh Power Corporation Limited, Purvanchal Vidyut Vitran Nigam Limited, and Paschimanchal Vidyut Vitran Nigam Limited—were the top loss incurring PSUs.  These three PSUs accounted for 73% of the total losses of Rs 7,411 crore mentioned above.   Note that as of June 2022, for each unit of power supplied, the revenue realised by UP power distribution companies (discoms) is 27 paise less than cost of supply.  This is better than the gap of 34 paise per unit at the national level.   However, the aggregate technical and commercial losses (AT&C) of the Uttar Pradesh discoms was 27.85%, considerably higher than the national average of 17.19%.  AT&C losses refer to the proportion of power supplied by a discom for which it does not receive any payment.

Off-budget borrowings: CAG also observed that the Uttar Pradesh government resorted to off-budget borrowing through state owned PSUs/authorities.  Off budget borrowings are not accounted in the debt of the state government and are on books of the respective PSUs/authorities, although, debt is serviced by the state government.  As a result, the outstanding debt reported in the budget does not represent the actual debt position of the state.  CAG identified off-budget borrowing worth Rs 1,637 crore.  The CAG recommended that the state government should avoid extra-budget borrowings.  It should also credit all the loans taken by PSUs/authorities on behalf of and serviced by the state government to state government accounts.

Management of Reserve Funds

The Reserve Bank of India manages two reserve funds on the behalf of state governments.   These funds are created to meet the liabilities of state governments.  These funds are: (i) Consolidated Sinking Fund (CSF), and (ii) Guarantee Redemption Fund (GRF).  They are funded by the contributions made by the state governments.  CSF is an amortisation fund which is utilised to meet the repayment obligations of the government.  Amortisation refers to payment of debt through regular instalments.  The interest accumulated in the fund is used for repayment of outstanding liabilities (which is the accumulation of total borrowings at the end of a financial year, including any liabilities on the public account).  

In line with the recommendation of the 12th Finance Commission, Uttar Pradesh created its CSF in March 2020.  The state government may transfer at least 0.5% of its outstanding liabilities at the end of the previous year to the CSF.  CAG observed that in 2020-21, Uttar Pradesh appropriated only Rs 1,000 crore to the CSF against the requirement of Rs 2,454 crore.  CAG recommended that the state government should ensure at least 0.5% of the outstanding liabilities are contributed towards the CSF every year.

GRF is constituted by states to meet obligations related to guarantees.  The state government may extend guarantee on loans taken by its PSUs.  Guarantees are contingent liabilities of the state government, as in case of default by the company, repayment burden will fall on the state government.  GRF can be used to settle guarantees extended by the government with respect to borrowings of state PSUs and other bodies.  The 12th Finance Commission had recommended that states should constitute GRF.  It was to be funded through guarantees fees to meet any sudden discharge of obligated guarantees extended by the states.  CAG noted that Uttar Pradesh government has not constituted GRF.  Moreover, the state has also not fixed any limits for extending guarantees.  

For an analysis of Uttar Pradesh’s 2022-23 budget, please see here.