While there are constraints on the revenue front due to shortfall in RBI dividends, spectrum receipts and lingering uncertainties over the GST revenue, the government has gone on record to state that it will try and meet this year’s fiscal deficit target of 3.2% of the GDP without cutting expenditure. It is likely to rely on enhanced receipts from PSUs as dividends and the disinvestment revenue which could touch Rs 1 lakh crore this year against the budgeted Rs 72,500 crore. However, as the rating agencies evaluate the overall government financial balance, it is important how the states have fared and are poised on the fiscal front. Given that private capex revival is still fragile, the governments are under an obligation to sustain a high spending momentum to pep up aggregate demand. In FY16, the state governments’ gross fiscal deficit-GSDP ratio deteriorated to 3.6% from the budgeted estimates of 2.4%, due to their participation in the financial and operational restructuring of state power distribution companies. An RBI report on state government finances recently noted an increase in the states’ debt burden, but went on to say that their overall fiscal position was found to be sustainable in the long run.
The RBI also said the introduction of GST, which will have economy-wide ramifications, held the “best bet” for state governments to improve their finances without cutting productive expenditure. A report by JP Morgan Chase was, however, less confident on states’ finances. It lamented “monotonically rising” state debt-to-GDP, with the “risk of it turning explosive”. It must be noted that the impact of the discoms’ debt recast scheme on the state governments’ finances — which entails transfer of discom debt to the governments’ budgets — is just a one-time recognition of liabilities, and not an increase in them. While most states have reported a revenue shortfall in the initial months of GST — some Rs 8,500 crore was given as compensation to them for July-August while the overall monthly (Centre+states) GST receipts have been in the region of Rs 92,000-95,000 crore — a clearer picture will emerge only after the GST stabilises in three-four months and the trend of integrated GST allocation to states is established. The NK Singh-led FRBM committee has suggested that the Centre’s aim for a fiscal deficit of 3% of the GDP for three straight years starting the current fiscal, gradually reduce it to 2.5% by 2022-23 and partner states in adhering to fiscal discipline. One of the yardstick used by rating agencies is the general public debt, with an emphasis on external debt. The Singh panel’s report was unique in the sense it kept debt, along with fiscal deficit, in the centre of fiscal management principles, moving away from the current practice of targeting only fiscal deficit.
It suggested a ceiling for general government (both the Centre and states) debt of 60% of GDP by 2022-23. And within this overall limit, a ceiling of 40% should be adopted for the Centre, and 20% for the states. While the Centre’s debt-to-GDP ratio was 49.4% in 2016-17, states’ stood at 21%, it said. The country’s average general government debt is as much as 28 percentage points higher than similarly-rated emerging market peers, the report said. Observing that India’s large and stable financing base will enhance on continued progress on reforms and will likely contribute to a gradual decline in the government’s debt burden over the medium term, Moody’s has observed that the proposed capital injection into public sector banks “will modestly increase the government’s debt burden in the near term” – by about 0.8% of the GDP over two years.