Mumbai: Finances of several Indian states are worsening after they took over the debt of their electricity distributors under the central government’s Ujjwal Discom Awas Yojana (Uday) initiative, says a Reserve Bank of India (RBI) study released on Friday.
Additional provisions states may have to make for Uday, increased calls for farm loan waivers and potential pay hikes for state government employees are other pressure points on state finances, the report said.
In this context, implementation of the Goods and Services Tax (GST) is crucial, given that the centre will compensate states for any loss of revenue in the initial five years after the switch-over to the new tax regime, it said.
For fiscal 2016-17, the revised figures for 25 states show that the consolidated fiscal deficit to gross state domestic product ratio (CFD-GSDP) is 3.4%, compared to the budgeted 3%. An increase in capital outlay and loans to power projects under Uday worsened fiscal indicators. Excluding Uday, the CFD of these states would have been 2.7% of GSDP, the report said.
For FY18, the central bank expects an improvement in the consolidated GFD-GSDP ratio to 2.6% compared to the centre’s budgeted 3.2%. It, however, cautioned that state liabilities may increase going ahead.
Apart from Uday liabilities on their books and farm loan waivers, the RBI study said additional provisions under Uday to provide working capital for electricity distributors, and state government guarantees towards public sector enterprises, could increase states’ debt.
“In terms of general government finances, centre’s efforts to carry forward fiscal consolidation could be squandered unless state finances are shored up and strengthened,” the report said.
The RBI study comes in the backdrop of the N.K. Singh committee’s report on fiscal responsibility and budget management (FRBM). The panel recently recommended that debt-to-GDP ratio be made the anchor of fiscal policy. It said by fiscal 2023, the debt-GDP ratio for India should be capped at 40% for the centre and 20% for states. The debt-GDP ratio for states stood at 23.9% at the end of March and will need to be “considerably” tightened.
One way states will gain is through GST, the RBI report said. GST is due to be implemented on 1 July.
“The successful implementation of GST will result in additional revenue through simpler and easier tax administration,” said the report. “The GST is expected to reduce administrative costs for collection of tax revenue and improve revenue efficiency. Moreover, uniformity in tax rates and procedures across the country will economise on compliance cost. It will also lead to increase in the shareable pool of resources, resulting in larger central transfer to the states which, in turn, will enable them to undertake much needed developmental expenditure. Such an outcome would ensure debt sustainability for states in the long term.”
In the medium-to-long-term, GST is likely to increase the tax buoyancy of the central and state governments by 0.6%, which is likely to reduce the gross fiscal deficit by 0.7-1.2% of GDP if disinvestment receipts and non-tax revenues remain unchanged from the trend of the previous 5 years, the study added.