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GS Paper: GS3-03.Government Budgeting

  • [op-ed snap] The stress in state finances

    Context

    Lower tax devolution, delays in GST compensation are potential risks to the states.

    Trends in the finances of the state

    • The unaudited fiscal data of 21 states:
      • These states account for around 90 per cent of India’s GDP in 2017-18. The data reveal some trends.
    • First Trend: Revenue receipt sliding down
      • From 15.6 to 4.6 %: At the aggregate level, revenue receipts of these 21 states have grown by a mere 4.6 per cent, sliding down from 15.3 per cent over the same period last year.
      • Decrease in Central tax devolution: The analysis shows that the states’ share in Central tax devolution has slowed the most, contracting by 2.3 per cent during this period, after having grown by 12.1 per cent over the same period last year.
    • Second trend: The Centre’s gross tax revenues are expected to fall short of the budgeted target by a considerable Rs 3- 3.5 trillion this fiscal year.
      • The aggregate tax devolution to all states may be as much as Rs 1.7 – 2.2 trillion lower in the current fiscal year than what was budgeted.
      • This is a key revenue risk staring at the state governments this year.
    • Third trend: States own tax and non-tax revenue contracting.
      • The states’ own non-tax revenues have contracted by 5 per cent during the first eight months of this fiscal year, after an expansion of 15.3 per cent over the same period last year.
      • Decreasing tax revenue: Growth of states’ own tax revenues, the largest source of their revenue receipts, eased to a tepid 2.2 per cent during this period from a healthy 16 per cent over the same period last year.
      • This is in part by the modest rise in collections of the State Goods and Services Tax (SGST).
    • Fourth trend: Increase in the grants from the Centre
      • The primary factor boosting the GST compensation seems to be the low growth in states’ GST revenues relative to the mandated 14 per cent annual growth for the five-year transition period.

    Delay in receipt of the GST collection and the risk

    • Some state has voiced concerns over the delays in receipt of the compensation amount in recent months.
      • The delay has complicated their fiscal position and cash flow management.
      • Risk for the states: The timing of receipt of the compensation is the second major revenue risk facing state governments.
      • If compensation gets delayed to the next fiscal year, we may well find some traditionally revenue surplus states staring at a revenue deficit
      • Case of no GST compensation: But it seems states will have to start gearing up for life without the GST compensation.

    The Rise in State Development Loans or Market borrowing by states

    • SDL rising in first three quarters: According to ICRA’s estimates, net SDL issuance of all states and UTs rose by 15.5 per cent to Rs 2,806 billion in the first three quarters of this fiscal year, up from Rs 2,429 billion last year.
      • The combined gross SDL issuance has expanded by a significant 34.9 per cent to Rs 3,874 billion this fiscal year (April-December), up from Rs 2,872 billion last year.
      • The calendar for state government market borrowings for the fourth quarter indicates tentative gross SDL issuances of Rs 2,086 billion in the quarter, implying a moderate 9.1 per cent growth.
      • But, this conceals a large dip in redemptions.
      • Net SDL issuances will expand by a staggering 55.7 per cent to Rs 1,766 billion in Q4FY20, up from Rs 1,134 billion last year, underlining the stress in state government finances this year.
    • About 25 % rise in borrowing this fiscal: If market borrowings in the fourth quarter are in line with the amounts indicated, total gross borrowing this fiscal year would rise by 24.6 per cent to nearly Rs 6 trillion, up from Rs 4.8 trillion last year.
    • Net borrowing by states as large as Central govt. borrowing: Net borrowings by states would rise by an even sharper 28.3 per cent to Rs 4.6 trillion this year, becoming nearly as large as the Central government’s net market borrowings of Rs 4.7 trillion that have been announced so far for this year.

    Conclusion

    The figure and the trends indicated the financial risk the states are staring at. The government must take measure to revive the economy in order to address the problems faced by the states and ensure that the states are not left in lurch while SGT compensation receipts get delayed.

     

     

  • [op-ed snap] Limited scope for sharp recovery

    Context

    In order to revive the economy, the Government must choose between tax reductions and increasing rural spending.

    The Current Status of the Indian Economy

    • 5 % in 2019-20: The first advance estimate pegs India’s economic growth at 5 per cent in 2019-20.
    • Cause of the slowdown: The slowdown can be attributed largely to a structural demand problem in the economy along with some cyclical
    • Stagnant income and stagnant incomes: Despite largely stagnant incomes, private consumption has been financed over the past few years through lower savings, easy credit, and certain one-offs such as the Seventh Pay Commission led pay-outs.
    • Private consumption is the largest driver of growth.
    • Depleting savings: The household savings rate has dipped to 17.2 per cent of GDP in FY18, from 22.5 per cent in FY13.
    • Depleting credit in the system: Overall credit in the system has dried up.

     Rural economy

    • Low wages and stagnant incomes: Rural wage growth has averaged around 4.5 per cent over the past five years, but adjusting for inflation it has been only 0.6 per cent.
    • Weak real estate sector: The rural population, which was dependent on urban real estate/construction has faced headwinds in the recent past.
    • The sector is experiencing lower private sector investments recently.

    Limited scope for a sharp recovery

    • The following factors render the scope for sharp recovery limited.
    • Consumption issue is structural:  The slowdown in private consumption is a structural issue linked to low household income growth.
    • Low job creation: Low consumption is in turn, linked to the basic problems of low job creation.
    • Low Income: Low consumption is also linked with stagnant farm incomes.
    • None of the above factors is likely to change suddenly, limiting the scope of recovery.
    • Low Investments: Investment is unlikely to rebound sharply given the challenges on both income and balance sheet of the government, private sector, and households.
    • Stressed Government consumption: Which has been supporting growth over the past few years, remains under stress.
    • The combined Centre and states’ fiscal deficit is close to 6.5 per cent of GDP.
    • The public sector is already weighing on the limited domestic financial resources, ruling out space for an aggressive fiscal stimulus.
    • NBFC’s role: Recovery will also depend on the health of the financial sector, especially that of NBFCs.

     Use of the fiscal space

    • Supply-side: The government has shown a clear preference to rely on supply-side measures (like corporate tax cut) to support growth.
    • Need to address demand-side: Expectations will be high that the upcoming Union budget addresses the demand side concerns as well.
    • Spending on rural infrastructure and employment (MGNREGA, PM-KISAN, PMGSY) can decrease pain in rural areas.
    • Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.

    Way forward

    • Widening of the tax base- Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.
    • Broad-basing of the income and consumption profile: Economic reforms in the past have worked to enhance the capacity of the top few hundred million consumers.
    • The next set of reforms should enhance the capacity of those in the middle and the bottom of the income pyramid.
    • Role of the private sector: Given the huge infrastructure gap in the country, it is essential that the private sector’s role in infrastructure creation is much more inclusive.

    Conclusion

    Reforms that increase the productivity of the factors of production, provide an enabling environment for competitive production of goods and services and ensure steady and substantial growth in purchasing power for a larger section of the population should be the focus.

     

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