‘Boost states’ own revenue and create fiscal space for higher capital outlays’
In its latest annual appraisal of state government finances using data till FY15 budget estimates, the RBI has noted that most states reaffirmed their commitment to fiscal consolidation after a slippage in FY14 (that led to a wiping out of moderate revenue surplus created in the previous year) and saw strong growth in capital spending in 2013-15, albeit with some moderation in the later year.
Other important takeaways from the RBI report, released late Tuesday evening, is that states’ outstanding liabilities were budgeted to increase at a bit-worrying 12.2% to R27.3 lakh crore in FY15, compared with 10.3% in the previous year and 10.8% in the year before. Stating that a marginal decline in debt-GDP ratio, relative to the 13th Finance Commission targets, that was still achieved by non-special category states was nothing to write home about (given that it came from a “more-than-proportionate” growth in nominal GDP), the RBI questioned the utility of putting fiscal targets as ratio of nominal GDP and called for alternatives like defining targets in real terms or “prescribing expenditure rules rather than deficit rules”.
The RBI further noted that despite the budgeted reduction in the GFD-GDP ratio in FY15, the debt-GDP ratio would marginally rise owing to the takeover of bonds issued by power discoms by eight states under the fiscal restructuring plan for these debt-laden entities.
“As the states participating in the FRP would have to progressively take over the entire bond liabilities of the discoms by FY18, their liabilities would increase in the coming years. Further, under the FRP, short-term liabilities amounting to R51,200 crore have been restructured by the lenders that are backed by state government guarantees.
This would increase the contingent liabilities of the participating states,” the RBI said.
The RBI report, which came in the backdrop of the 14th Finance Commission award that increased the Centre’s tax devolution to states from 31.5% of the divisible pool of taxes in FY15 to 42% for the five years starting FY16 and increased total FC-enabled transfers to 47.7% (FY15-20) from 36.9% (FY15), stressed that efforts should be redoubled to sustain the pick-up in capital outlays of FY14. “Windfall gains accruing over time from auctioning of natural resources need to be channelised effectively for meeting developmental needs of the mineral rich states,” it said.
The study also revealed an increased reliance of states on market borrowings (46.8% of total outstanding liabilities in FY15 compared with 43.1% in FY14 and 39.35 in FY13).
Though growth in VAT revenue improved in FY14, other own tax revenues did not live up to expectations while a robust 48% rise in grants from the Centre came in useful; yet the gross fiscal deficit of states in relation to GSDP widened to 2.5%, from 2.2% in FY13.
It is germane to note that the RBI assessment is based on FY15 budget estimates, whereas there is bound to be slippages in the revised estimates made by the states in their recent budgets. The central bank admits this by saying that the “initial expectations” now unveiled might warrant a careful assessment, in the light of the (RE) information available for 17 states.
For instance, GFD as proportion of GSDP of these 17 states, which accounted for 88% of the both the non-debt receipts and total expenditure of all states, was 3.1% as per the REs compared with 2.6% projected earlier (BEs).
In a recent report, “India: A peak into state finances”, Nomura said: “… despite higher transfers from the Centre, there is not a concomitant fiscal consolidation at the state level. Furthermore, additional resources are not being used by the states for more capital expenditure.” It added that while there were state-level divergences, the overall government (centre + states), based on FY16 targets, is “expansionary”. The Centre had revised its fiscal deficit target to 3.9% of GDP in FY16 from 3.6% envisaged earlier.
Uniform model for taxing e-commerce sought
In its report on state finances, the RBI underscored the need to reinvigorate states’ own revenue streams and argued for stepping up tax revenues from the e-commerce sector. “…attention will need to be paid to the development of a uniform model for taxing e-commerce to reduce the complexity and improve compliance. Taxing the burgeoning e-commerce space could bolster states’ own revenues, provided there is greater clarity around rules and procedures governing inter-state trade,” RBI said.