Already, robbed of revenues from local levies from auto fuels, alcohol, real estate transactions and entertainment, during the lockdown, states' finances are in a precarious position.
Given the Union government’s gross tax revenues are likely to fall way short of the budgeted Rs 24.23 lakh crore, states will be badly hit as they receive far smaller revolutions. Already, robbed of revenues from local levies from auto fuels, alcohol, real estate transactions and entertainment, during the lockdown, their finances are in a precarious position. States own tax revenues contribute roughly 40% to their revenue receipts.
The combined revenues — states and Centre — budgeted at just over Rs 50 lakh crore for 2020-21, could fall short by about Rs 7-8 lakh crore, economists say. The big concern is that the Centre’s sharp jump in net borrowings in 2020-21 will pressure the bond markets, making it even more costly for states to mop up funds; yields which slipped below 6% on Friday are expected to climb back to over 6% soon. States are estimated to borrow a net Rs 4.3 lakh crore in the current year; a clutch of 19 states managed to pick up Rs 32,560 crore from the bond market a little less than the Rs 37,500 they were hoping to, at an auction in early April.
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As many as nine states raised 10-year bonds at yields between 7.80% and 8% on April 7, a spread of 140-160 basis points over the benchmark yield. The spreads were wider than the 115-bps at the March 30 auctions. Kerala coughed up 8.96% for 15-year money.
Reserve Bank of India’s indicative Q1 FY21 quota for states of Rs 1.27 lakh crore is about 56% more than last year’s quota. However, they might need to raise a lot more with revenues in April at a fraction of the usual levels. Otherwise, expenditure, even on essentials will need to be slashed.
Kerala finance minister Thomas Isaac said on a television channel last week the state had mopped up April revenues of around Rs 800 crore compared with the normal levels of Rs 8,000 crore. Even before this, in November, last year, a clutch of state finance ministers had alleged the Centre was holding back Rs 40,000-45000 crore of GST compensation. States own tax revenues, for 2020-21, are estimated at Rs 15 lakh crore.
The revised central tax devolution to states in FY20 of Rs 6.6 lakh crore was significantly lower by Rs 1.5 lakh crore on account of the excess devolution of Rs 58,800 crore that had been transferred in FY19 as well as a downward revision in the estimate of tax collections for FY20.
Moreover, central tax devolution contracted by 11% in FY20 from Rs 7.4 lakh crore in FY19. On Friday, the government upped the gross borrowing target for 2020-21 by Rs 4.2 lakh crore to Rs 12 lakh crore; earlier it had planned to mop up Rs 7.8 lakh crore.