Covid has eroded states’ finances: RBI2 min read . Updated: 28 Oct 2020, 08:28 AM IST
- States’ outstanding debt may reach 75% of GDP at March-end 2021, RBI report said
The surge in indebtedness of states owing to the covid-19 pandemic poses a risk to their finances, worsened by government guarantees to support power distribution companies, 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, said the RBI report titled State Finances: A Study of Budgets of 2020-21.
“The pandemic may also leave lasting scars on federalism in India," it added.
Released on Tuesday, the report said 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 healthcare systems and other social safety nets in line with the states’ demographic and co-morbidity profiles," it said.
The report added that state governments’ 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 coronavirus pandemic which spawned a public health crisis and 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.
States had to deal with a massive wave of reverse migration during the pandemic, especially at the peak 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.