Spotlight

New Delhi, 5 May, 2017

States Fiscal Deficit

VITAL TO GENERATE RESOURSES

By Dhurjati Mukherjee

India’s fiscal deficit has been brought under control though the States shortfall will increase marginally to 3.3 per cent of GDP in 2017-18, according to India Ratings & Research estimates. India’s combined debt of around 70 per cent of GDP is one of the highest among emerging markets, topped only by Brazil.

Consequently, the talk of an international conspiracy to keep India’s credit rating low is not valid. The fact remains that for the country to credibly improve its ranking it must work on fiscal discipline of the Centre and States.      

Meanwhile, the minutes of Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) reveal a major concern for the undoing of the Central Government’s fiscal disciple by State Governments was loan waivers. Undeniably, State Governments finances have turned unfavourable in recent years and according to experts the over 3 per cent deficit is likely to stay wide in the current financial year.

Pertinently the N. K. Singh panel on ‘Fiscal Responsibility and Budget Management’ (FRBM) guidelines might help States to make suitable changes in their fiscal deficit targets, specified under the FRBM Act.  

Besides, despite recruitment being severely curtailed in most States, the burden of increasing salaries, contractual retention charges have been growing. According to figures, this amounts to around 10 per cent of the SGDP.  Moreover, as a share of the GDP, the Centre’s pay cheque to States was 6.8 per cent in 2015-16 which was reduced to 6.6 per cent this fiscal.

And the Budget has further brought this down to 6.4 per cent in 2017-18. This clearly shows that the States are left to fend for themselves, either by fighting the odds to reduce deficits or having to borrow even more from the market.       

Undoubtedly, the situation of the States is intriguing. Some of them, specially the bigger ones, are facing huge debts. These include Maharashtra, Uttar Pradesh, West Bengal and Andhra Pradesh. According to economists, these States are facing problems in spite of the Centre doing its job by raising the devolution as suggested by the Finance Commission. Others opine that while welfare expenditure needs to be curtailed, revenues need to be raised.      

Additionally, as per RBI figures Maharashtra’s debt burden is the highest at Rs 3.79 lakh crores followed by Uttar Pradesh at Rs 3.27 lakh crores and West Bengal at Rs 3.08 lakh crores. In the latter’s case the ratio of taxes to the Gross State Domestic Product should have been around 7 per cent. But is actually a little above 5 per cent.      

Further, there has been a decline in State revenues as percentage of GSDP between 2011-12 and 2015-16. Between 2014-15 and 2015-16 revenues as percentage of GSDP declined in states like Gujarat, Karnataka, Madhya Pradesh, Kerala, Rajasthan, Tamil Nadu, West Bengal and the North Eastern States.

Hence, it goes without saying that the States are cash strapped with development activities not increasing at the desired pace. This does not augur well for the country as balanced development of the countryside and upgrading the living conditions of the poor and the economically weaker sections are an immediate necessity.

Alongside, in spite of all efforts at development, the poor and impoverished sections are at the receiving end, specially vis-à-vis education, health and basic necessities of life. Even drinking water availability is not ensured topped by inadequate sanitation facilities.

Notably, the massive expenditure needed for improving social and physical infrastructure along-with effective implementation of plans and projects is a big challenge which needs to be seriously considered.

Certainly, it is difficult to foresee the problems the States would face in the coming years. In the meantime, even as States are vying with each other to attract investment and boost up industrialization, the fact remains that there is little scope of conditions improving in most States. Indeed, the introduction of GST and efforts at revenue generation is critical to reverse the present trend.

The Eastern and the North Eastern States are most vulnerable as their growth over the last 2-3 years leaves much to be desired. While the Eastern States have to find ways and means to increase their revenues --- which West Bengal has been successful to some extent --- more subsidies have to be given to the seven sisters in the North East. Alternatively if tourism is promoted in a big way in the latter region, their revenues might increase to some extent.

One needs to recall and underscore that the fall in States’ own tax revenues and lower net transfers from the Government did the damage since 2015-16. For instance, lower oil prices reduced the ad valorem taxes on petrol and diesel, a huge income item for States, affecting revenue collections.

On the other hand, while higher devolution of divisible pool (hiked from 32 per cent to 42 per cent) led to higher revenue transfers from the Centre, grants were also cut through reduced outlay for eight Centrally-sponsored schemes, such as National e-Governance Plan, Backward Regions Grant Fund and Rajiv Gandhi Panchayat Sashaktikaran Abhiyan (RGPSA). Interestingly, on a net basis, as per a RBI report, State Governments received less net transfers to the extent of 0.3 per cent of their GDP in the financial year ended March 2016.

Nevertheless the situation is not as grim as it was during the crisis years. While the States went from a revenue surplus to a revenue deficit situation, revenue shortfall of the general Government fell to 2.8 per cent of GDP in 2015-16, thanks to better performance of the Central Government on the revenue front.

For example, the UDAY scheme might not be negative. “This was an off-balance sheet item earlier, which is now in the books of the State Government. If the power sector picks up, it could be good for the State finances — over the long term,” asserted an economist from a renowned bank.

However, what is discomforting is the fact that the deficit levels for the Government have risen, that too during times when the household savings into financial assets have been falling. Historically, the savings of the households have sponsored the borrowings of the Government.

Today, household savings have fallen to around 7.5 per cent of GDP (from earlier level of 11 per cent), thanks to higher inflation --- which in turn led to negative real interest rates (till recently). Now that inflation levels are much lower, leading to positive real interest rates, if households don’t begin re-investing into financial assets like earlier, a glum fiscal situation may occur again. ---- INFA

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