From UPSC perspective, the following things are important :
Prelims level : Not much.
Mains level : Paper 3- Effects of low growth rate on the State's finances.
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.
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.