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NEW DELHI : State governments’ fiscal deficit widened in absolute terms by a massive 78% to 9.3 trillion in FY21, new figures showed, the effect of the harsh pandemic-induced lockdown that still marks out aspects of Centre-state financial relations.

A deficit in absolute terms is the straight difference between revenue and spending, as opposed to calculating deficit as a percentage of gross domestic product.

The figures, part of the RBI’s Handbook of Statistics on Indian States released on Saturday showed the pandemic pushed up welfare spending and squeezed revenue. States had a fiscal deficit of 5.2 trillion in FY20. Barring Arunachal Pradesh, Haryana, Sikkim and Odisha, all states saw their fiscal deficit shoot up in FY21 in absolute terms, the report said, quoting revised estimates.

Policy implications of the tightened finances have lingered. In the budget for 2022-23, 1 trillion was allocated as interest-free 50-year capex loans for states to be spent on new or ongoing projects, including Gati Shakti, the PM Gram Sadak Yojana and digitization.

According to the RBI report, states’ revenue collection showed a mixed trend with receipts staying steady in many cases. But Karnataka, Kerala, Madhya Pradesh and Maharashtra witnessed a marginal decline in their tax revenue receipts in FY21.

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Overall tax revenue receipts of states inched up by 1.6% in FY21 to 12.4 trillion from the year-ago period, indicating the financial weakness of all states due to the loss of economic activity.

It’s not states alone that were hit. In fact, in the case of the Union government, fiscal deficit widened to 9.3% of GDP in 2020-21 from 4.6% in the previous fiscal.

In 2019-20, the unprecedented national lockdown, followed by widespread regional lockdowns, crimped consumption on discretionary items and contact-intensive services, which curtailed the indirect tax revenues of the Union government and states from the goods and services tax. A sharp decline in mobility led to a fall in mop-up of state duties on fuel.

All the states missed their fiscal deficit targets and made use of the additional borrowing space that was offered by the Centre during that year. According to Care Ratings study, the average deviation was 1.7% for 11 major states from their budgeted fiscal deficit.

Madhya Pradesh had a lower deviation due to the late announcement of the Budget, but ended with a deficit of 5.7%. Gujarat had the lowest revised fiscal deficit of 3.1%, followed by Jharkhand with 3.22%, Karnataka with 3.23%, Maharashtra with 3.29%, and Odisha with 3.49%. The widest revised fiscal deficit was recorded by Bihar at 6.8%, followed by Rajasthan at 6.1% and Chhattisgarh 6.5%. UP ended with a 4.2% fiscal deficit while Kerala reported 4.25%.

As most state governments were unable to increase revenue, they cut their capex. While lockdown had led to several projects being stalled, migration of labour further delayed the resumption of projects.

For the 11 major states, the total projected capex was 3.74 trillion which was revised downwards to 3.19 trillion, according to Care Ratings. Capex for all states combined was cut by 15% in 2020-21.

States’ own tax revenue had slipped quite sharply from budgeted 9.31 trillion to 7.82 trillion in the revised estimate. The fall in own tax revenue by 15.9% amounted to 1.49 trillion. Of the total of 9.31 trillion, 42% was to come from GST, 19% from VAT, 13% from excise and 11% from stamp duty. The highest fall in own tax revenue was seen in Kerala.

gireesh.p@livemint.com

ABOUT THE AUTHOR

Gireesh Chandra Prasad

Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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