What are the findings of the RBI report States Finances: A Study of Budgets of 2019-20?

Published: October 2, 2019

The RBI report States Finances: A Study of Budgets of 2019-20 makes the following observations:

  • The outstanding debt of states has increased to 25 per cent of Gross Domestic Product over the last five years. This poses medium-term challenges to its sustainability.
  • The states’ gross fiscal deficit was within the threshold of 3 per cent of gross domestic product (GDP) during 2017-18 and 2018-19 as prescribed under Fiscal Responsibility and Budget Management laws in the last two years. But it was made possible through sharp reductions in capital expenditure by states.
  • States have budgeted for a consolidated GFD of 2.6 per cent of GDP with a marginal revenue surplus for 2019-20.
  • The sharp reduction in capital expenditure by states may result in potentially adverse implications for the pace and quality of economic development since public expenditure by states influences the quality of physical and social capital infrastructure of the economy.
  • States are required to combine efforts towards mobilising higher revenues with strategies to maximise efficiency gains rather than a mere increase in tax rates.
  • Unless revenues pick, states will be forced to cut capital expenditure, further stoking the economic slowdown.
  • Reduction in capital expenditure can lead to an ever-tightening vicious spiral of austerity deepening the economic downturn which, in turn, cramps fiscal revenues and forces further expenditure reductions and so on.
  • States’ revenue prospects are confronted with low tax buoyancies, shrinking revenue autonomy under the GST framework and unpredictability associated with transfers of IGST and grants.
  • Unrealistic revenue forecasts in budget estimates are resulting in expenditure compression in even the most productive and employment-generating heads.
  • States are required to gradually harness the GST database to expand the tax base.

The report has warned states about the risks of off-budget liabilities in the form of guarantees mutating into a contingent risk to debt sustainability even as structural bottlenecks in power distribution continue to foster. States would be forced to take over higher losses of power distribution companies if they do not show a turnaround in their performance.

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