RBI’s Report on State Finances

• 03 Oct 2019

The Reserve Bank of India (RBI) has released a report titled "State Finances: A Study of Budgets of 2019-20".

• It is an annual publication that provides information, analysis and an assessment of the finances of state governments.

Key Findings

• Fiscal Deficit:
  
  • States’ Gross Fiscal Deficit (GFD) has remained within the Fiscal Responsibility and Budget Management Act (FRBM) threshold of 3% of Gross Domestic Product (GDP) during 2017-18 and 2018-19.
  • For 2019-20, States have budgeted a consolidated GFD of 2.6% of GDP.
• Concerns:
  
  • Outstanding debt of States have risen over the last five years to 25% of GDP, making sustainability of debt the main fiscal challenge.
  • States’ GFD was within the threshold of FRBM Act due to sharp reduction in capital expenditure by states.
    
    • Sharp reduction in capital expenditure by states has potentially adverse implications for the pace and quality of economic development. This is because states employ about five times more people and spend around one and a half times more than the Centre.
    • Moreover, public expenditure by states influences the quality of physical and social capital infrastructure of the economy.
• Challenges:
  
  • States’ revenue prospects are confronted with low tax buoyancies, shrinking revenue autonomy under the Goods and Services Tax (GST) framework and unpredictability associated with transfers of the Integrated GST (IGST) and grants.
    
    • Unrealistic revenue forecasts in budget estimates thereby leave no option for states than expenditure compression in even the most productive and employment-generating heads.
  • States may have to take over higher losses of power distribution companies if they do not show a turnaround in their performance.
• Suggestions:
  
  • States need to gradually harness the GST database to expand the tax base.
  • They also need to review their tariff policies relating to power and irrigation, keeping in mind the break-even user charges.
  • States need to combine efforts towards mobilising higher revenues with strategies to maximise efficiency gains rather than mere increase in tax rates.

The Fiscal Responsibility and Budget Management (FRBM) Act

• The Act was enacted in 2003 which set targets for the government to reduce fiscal deficits. The targets were put off several times.
• Hence, in May 2016, the government set up a committee under NK Singh to review the FRBM Act.
  
  • The committee recommended that the government should target a fiscal deficit of 3% of the GDP in the years up to March 31, 2020, cut it to 2.8% in 2020-21 and to 2.5% by 2023.

Fiscal Deficit

• Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure.
• It is an indication of the total borrowings needed by the government.
  
  • It is to be noted that while calculating the total revenue, borrowings are not included.
• Gross Fiscal Deficit: It is the excess of total expenditure over revenue receipts (including external grants) and non-debt capital receipts.
• Net Fiscal Deficit: It is the gross fiscal deficit less net lending of the Central government.

Source: IE