The salvaging of the states' fiscal position was from a serious, trend-reversing slippage of 80 basis points to 3.2% of GDP on year, as reflected in the revised estimates in the Budgets presented in February-March.
Even though their combined revenue receipts turned out to be a steep 12% lower than estimated (BE) for 2019-20, state governments exercised sudden, drastic controls on both revenue and capital expenditures in the final months of 2019-20, to keep their consolidated gross fiscal deficit (GFD) to GDP ratio at 2.6%, exactly as budgeted, the Reserve Bank of India said on Tuesday. The salvaging of the states’ fiscal position was from a serious, trend-reversing slippage of 80 basis points to 3.2% of GDP on year, as reflected in the revised estimates in the Budgets presented in February-March.
However, the central bank noted that the states’ budgeted GFD-GDP ratio of 2.8% for the current financial year, had come under threat even before the pandemic struck the domestic and world economies, because the receipts base (of 2019-20) was much smaller than the revised estimate (RE).
The Centre’s fiscal deficit in 2019-20 turned out to be 4.6% of GDP as against BE of 3.3%, due to a huge revenue shortfall. The target for 2020-21 is 3.5%, but many analysts have estimated this to more than double to 7-8%.
The RBI analysis relied on the aggregation of monthly provisional accounts (PA) estimates of receipts and expenditure of individual states by the Comptroller and Auditor General of India (CAG). “PAs are available with a lag of about another two months (from REs presented close to the end of the fiscal year), and accounts arrive with an additional lag of about nine to ten months. REs reveal a systematic upward bias, albeit with outliers across states,” the RBI said.
India real GDP growth plummeted to an 11-year low of 4.2% in 2019-20. The nominal GDP growth for the year was 7.2%, compared with 12% estimated for the central Budget.
In commentaries offered with its bi-monthly monetary policy update on October 9, the RBI forecast a 9.5% contraction in the real GDP growth in the current pandemic-ravaged year, with “risks tilted to the downside”. Among prominent global agencies, only S&P (-9%) had forecast a narrower economic contraction for the country.
In 2020-21, about half of the states have budgeted the GFD-GSDP ratio at or above the 3% threshold. “The direction of possible revision is evident from the fact that the average (GFD-GSDP) ratio for states presenting their budget before the outbreak of the pandemic is 2.4%, while the average for the balance number of states that made post-outbreak budget presentation is 4.6% of GSDP,” the RBI said, unveiling its annual report on states’ finances. Thus, the central bank noted, states are grappling with the pandemic with constrained fiscal space. In terms of primary balances, states are clearly in an unfavourable position, with most states incurring primary deficits in 2019-20, as against primary surpluses at the onset of the global financial crisis, it added.
While the revenue receipts of all states were pegged at Rs 31.54 lakh crore (BE) for 2019-20, the provisional accounts released by CAG estimated these at much lower at Rs 27.63 lakh crore. These receipts were Rs 26.21 lakh crore in 2018-19. However, the states slashed their revenue expenditure in 2019-20 to Rs 28.36 lakh from the BE of Rs 31.76 lakh crore and the capex to Rs 4.97 lakh crore (BE Rs 6.22 lakh crore). This enabled a GFD-GDP ratio of 2.6% and consolidated revenue deficit-GDP ratio of 0.4%, while the budget target was to eliminate this deficit.
So far in the current fiscal, 28 states and 2 UTs have cumulatively raised a total of Rs 4.27 lakh crore via market borrowings, 50% more than the borrowings in the corresponding period of 2019-20. As per the borrowing calendar for the first 3 quarters of 2020-21, the states are to borrow Rs 5.07 lakh crore. States have already borrowed 84% of this amount, CARE Ratings noted.
The central government has permitted 21 states to cumulatively raise an additional Rs 78,452 crore via market borrowings in the current financial year. This borrowing is towards meeting the shortfall in GST compensation from the center to the states. These 21 states agreed to the proposal of the GST council to borrow from the open market to meet the GST compensation shortfall.