State finances in trouble again

State finances in trouble again

Municipal in nature, reckless in desire and quite often a source of difficult problems, state finances are in news again. After almost seven odd years of tranquillity, state deficits are set to reappear.

What are the sources of the problem? On the revenue side, slower economic growth is likely to result in lower value-added tax (VAT) receipts. VAT contributes nearly 42% to the states’ tax kitty. Slower industrial growth and a weak realty sector, too, will exact a price. State excise, stamp and registration duties, together accounting for around 17% of revenue, will also be hit.

On the expenditure side, the Sixth Pay Commission award is likely to add 0.5% of GDP to the fiscal deficit figure. In one way, the burden on this count is much less compared with the situation that prevailed when the Fifth Pay Commission award was implemented. That added 1.5% of GDP to the fiscal deficit figure. What complicates things is that when combined with heavy expenditure by the Centre, slow economic growth and higher salaries have the potential to make the combined fiscal deficit figure touch the 10% of GDP mark. In contrast, the “official" fiscal deficit figure still hovers around 2.5% of GDP.

This being an election season, the urge to spend more than what states have is likely to prove irresistible. Already, there are calls for “suspending" the Fiscal Responsibility and Budget Management (FRBM) Act. It’s not surprising that these calls are being made by some states that are in bad fiscal shape. Kerala’s finance minister, T.M. Thomas Isaac has been making this demand for some time. Greater “financial resources", a thinly divided argument against the FRBM Act, was also heard at the meeting of the empowered committee of state finance ministers in early November. Kerala, West Bengal and Punjab were at the forefront of this demand. No marks for guessing the identity of states with poor finances.

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