Fiscal position of India’s states likely to improve; debt burden sustainable: RBI

By: | Published: May 13, 2017 6:24 AM

Despite hike in debt, RBI feels the overall fiscal position of states is sustainable over the long run.

The GST remains the best bet for states to come back to the path of fiscal consolidation in the near-term, it said. (Reuters)

The combined fiscal position of India’s states is likely to improve in fiscal 2017-18, Reserve Bank of India (RBI) said in a report on Friday. The central bank noted that the increase in the debt burden of the states in recent years, notwithstanding, the overall fiscal position is found to be sustainable in the long run.

The ratio of states’ gross fiscal deficit (GFD) to gross state domestic product (GSDP) is budgeted at 2.6% for 2017-18, according to data available for 25 states. This is lower than the 3.4% in 2016-17 as per revised estimates, the central bank said. The number is also lower than the central government’s fiscal deficit target of 3.2% for 2017-18.

The GST remains the best bet for states to come back to the path of fiscal consolidation in the near-term, it said. Compensation by the Centre would cushion any revenue loss for the states in the initial five years, it noted. GST is likely to help revenue expansion foster closer co-operation between the states and the Centre and could pave the way for greater transfer of resources from the Centre to the states.

The threshold of 3% for the GFD-GSDP ratio was first recommended by the 12th Finance Commission and later endorsed by both the 13th Finance Commission as well as the 14th Finance Commission. It has also been acknowledged by state governments in their respective Fiscal Responsibility and Budget Management (FRBM) Acts.
However, the central bank remained cautious due to several risks, including the implementation of recommendations of states’ own pay commissions, farm loan waiver in some states and revenue uncertainty on account of the implementation of GST.

“On a comparable basis, the revised estimates of the GFD for 2016-17 were higher by 0.4 percentage point over the budgeted ratio — raising concerns about potential fiscal slippage,” the RBI said in the report. In 2015-16 as well, the GFD-GDP ratio deteriorated to 3.6% from the budgeted estimates of 2.4% for the year, crossing the threshold of 3% for the first time in more than 10 years.

Market borrowings, which have been a dominant source of financing the GFD, rose 29.7% to `3.8 lakh crore in 2016-17 from the previous year. The combined gross market borrowings of the central government and the states increased by 7.1% during the year.

The increasing reliance on market borrowing, along with the enabling conditions for additional borrowing by states as provided by the 14th Finance Commission, poses challenges for the sustainability of state finances as higher state borrowings raise yields and the cost of borrowing, the RBI said in the report.

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However, an increase in capital outlay by the states and the implementation of the goods and services tax (GST) would be positive for the states’ fiscal position, it said. The capital outlay increased to 2.9%, according to budget estimates, of the GDP in 2016-17 from 2.2% in 2014-15, data from the report showed.

“Notwithstanding the deterioration of the debt position of state governments in the preceding two years due to their participation in the financial and operational restructuring of state power distribution companies through UDAY, empirical evaluation reveals that the current fiscal policies of states are sustainable in the long run,” the RBI wrote.

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