Whether it is the lower tax rates under GST, the cut in value-added taxes (VAT) on petroleum, changes in accounting practices, or merely the slowing economy, states aren’t seeing buoyant revenue collections. An ICRA study of the finances of 22 states, based on provisional un-audited data from the Comptroller and Auditor General (CAG), reveals their combined revenue receipts between April and December, 2017, grew just 8.5% y-o-y. This is way lower than the 11.1% clocked in the corresponding period of 2016 and the result of a fairly sharp moderation in the collection of taxes, which rose just 6.7% compared with a more robust 9.5% in April-December, 2016.
This is somewhat surprising since the Centre has been compensating states for any loss in revenues post the rollout of the GST—as it is bound to do for five years and the compensation cess is being levied purely for this purpose. However, it is possible some states are classifying the compensation cess as grants though the increase in these too has moderated. In the absence of clarity, it is difficult to make any definite conclusions on tax collections. The moderation in revenues has seen states rein in expenditure and, consequently, the combined fiscal deficit narrowed to Rs 2.6 lakh crore in April- December, 2017, from Rs 2.9 lakh crore in the comparable period of 2016. That might seem like prudent budgeting but, in fact, the fallout of the lower growth in revenues is that the increase in the capital outlay of these states contracted 6% y-o-y compared with a 23% y-o-y increase in April-November, 2016. Some of this could be due to states wanting to focus on benefits for the farm community; some states—Punjab, Uttar Pradesh (UP) and Rajasthan—have announced crop loan waivers. Also, as ICRA points out, the capex might seem lower due to a base effect relating to the Ujjwal Discom Assurance Yojana scheme as has probably happened with states such as Madhya Pradesh and UP. The delay in presenting budgets for 2017-18 by states where elections were held last year—UP and Punjab—might also have resulted in slower capex and it is possible some catching up would take place in the January-March quarter.
What’s worrying is that states don’t seem to be holding back on revenue expenditure; this has outpaced the rise in revenue receipts and, consequently, the revenue deficit has widened to `52,160 crore in April-December, 2017, up from `42,940 crore in the corresponding period of 2016. That’s unfortunate because the economy needs investments, especially by the government—both the Centre and states—since the private sector isn’t willing to add capacity. It is time states got their priorities right.