Next few years challenging for states, says RBI3 min read . Updated: 27 Oct 2020, 06:24 PM IST
- States’ outstanding debt, largely dominated by market borrowings, is expected to reach 75% of GDP at end-March 2021
- The central bank also emphasised on the importance of investing in health care systems and social safety nets
MUMBAI : The surge in indebtedness of states owing to the covid-19 pandemic along with continuing losses of power distribution companies (Discoms) and rising guarantees, poses a risk to state finances, going forward, the Reserve Bank of India (RBI) said in a report.
States have budgeted their consolidated gross fiscal deficit (GFD) at 2.8% of GDP in 2020-21; however, the covid-19 pandemic may alter budget estimates significantly, eroding the gains of consolidation secured in the preceding three years, RBI said in its report tiled, State Finances A Study of Budgets of 2020-21.
“The pandemic may also leave lasting scars on federalism in India," it said.
Released on Tuesday, the report said that the average GFD for states that presented their budgets before the pandemic is 2.4% of GSDP, while the average for budgets presented post-lockdown is 4.6%.
“Sustaining the recovery from the pandemic will reshape state finances, entailing boosting investment in health care systems and other social safety nets in line with the states’ demographic and co-morbidity profiles," it said.
The report added that state government’s finances have taken a body blow in the first half of 2020-21 and their gross fiscal deficit is projected to widen in 2020-21 beyond 4% of GDP in the baseline scenario.
Going forward, states need to remain empowered to provide growth impulses to the Indian economy and build resilience against future pandemics as well, it said. States have been at the forefront in the fight against the pandemic and the public health crisis it has spawned, besides the biggest migration in the world, the central bank said.
To that extent, the dual impact of the compression in tax receipts and higher expenditures has generated unprecedented pressures on fiscal positions at sub-national levels.
Moreover, states also had to deal with a massive wave of reverse migration during the pandemic, especially in the course of the nationwide lockdown. The report said that as against the conventional factors influencing the migrants’ movement, a different kind of push/pull factor worked during the pandemic, associated with high levels of informal unemployment.
“Indian states had to contend with reverse migration from abroad as well as across states, with large-scale implications for underlying activity, conditional upon the extent of dependence of states on migrants for factor income, employment and performance of micro, small and medium enterprises (MSMEs). This had implications for state finances as well," it said.
Moreover, states’ outstanding debt, largely dominated by market borrowings, is expected to reach 75% of GDP at end-March 2021, it said. According to the report, there is a compositional shift towards market borrowings after the recommendation of the Fourteenth Finance Commission to exclude states from National Small Savings Funds (NSSF) financing facility.
“Along with higher borrowings and the attendant servicing costs, debt sustainability of states is vulnerable to risks arising out of potential realisation of contingent liabilities in the form of guarantees, which have increased post covid-19," it said.
The central bank pointed out that as part of first tranche of the centre’s Aatma Nirbhar Bharat Package announced in May 2020, emergency liquidity infusion of ₹90,000 crore for cash-stressed power distribution companies (Discoms) was announced against state government guarantees, thus, adding to their contingent liabilities for 2020-21 by about 0.42 per cent of GDP.
“It may be noted that historically, any large accretion to states’ outstanding guarantees has, in general, been followed by an increase in debt," it said, adding that it could be an early sign of future fiscal risks.
The central bank also emphasised on the importance of investing in health care systems and social safety nets. “In this context, expanding states’ spending on health towards achieving the universal health coverage goal of 2.5% of GDP at the aggregate level must be brought forward in the agenda of fiscal priorities of states," it said.