Trend reversal! States’ capex bears the brunt of falling tax revenue growth

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Published: November 21, 2019 2:54:05 AM

Evidently, the states’ tax revenue from GST, which is roughly 60% of their own tax revenue, has taken a hit, but the compensation guaranteed for GST shortfall could offset this.

Tax revenue growth of the 17 states reviewed by FE was 2.4% in H1FY20, compared with 13.8% a year ago. (Representational image)Tax revenue growth of the 17 states reviewed by FE was 2.4% in H1FY20, compared with 13.8% a year ago. (Representational image)

Constrained by a big dip in tax revenue growth, state governments curbed their capital expenditure in the first half of the current fiscal, a move that could foil the Centre’s bid to aggressively deploy public capex to partly compensate for the delay in the revival of the private investment cycle. Given that roughly two-thirds of the general government capex is contributed by the states, the slashing of capex by states from the budgeted levels could deepen the economic slowdown.

According to an FE analysis of seventeen large states (only Bihar is a key omission due to non-availability of updated data), their capex grew just 2.2% in H1FY20 from the corresponding period last year, a sharp contrast with a 15% annual increase in the Centre’s budget capex during the first half. In fact, the Centre’s capex saw a steep acceleration of 65% in Q2FY20, even as its tax revenue was under stress, with growth of just 4.2% in the first half of the fiscal.

While the Centre has more fiscal maneuvering space than the states — it has substantial avenues to augment non-debt capital receipts and raise other non-tax sources of revenue besides more borrowing freedom — the decline in tax revenue growth is impacting state capex more directly.

Tax revenue growth of the 17 states reviewed by FE was 2.4% in H1FY20, compared with 13.8% a year ago. As many as eight of these states including Uttar Pradesh, Maharashtra, Gujarat, Andhra Pradesh, Madhya Pradesh and Telangana reported a year-on-year decline in their tax revenue growth in the first half.

Evidently, the states’ tax revenue from GST, which is roughly 60% of their own tax revenue, has taken a hit, but the compensation guaranteed for GST shortfall could offset this.

The overall GST collections have been below estimates and showed even negative growth rates in both September and October.

Given the steep fall in the states’ tax revenue growth in H1, it is clear that their revenue from own taxes other than GST like stamp duty, registration fee, sales tax, etc, have taken an even bigger hit. While several states are now complaining of the delays in release of GST compensation amounts, they received the succour for at least April-July period, which imply a GST revenue growth of 14% during the period.

The corporate tax cuts announced by the Centre alone is expected to reduce the tax transfers from the Centre to states from the divisible pool by as much as Rs 60,000 crore.

The precarious revenue position has forced many states to borrow more to keep the mandated revenue expenditure close to the budgeted levels. Borrowings by the 17 states were up 15% in H1FY20, compared with an annual increase of 5% a year ago.

The straining of the state finances of late could undermine their fiscal consolidation efforts. Over the last two fiscal years, states outperformed the Centre on the fiscal front.

According to a recent RBI report, the state governments, given their Budget targets, seemed poised to keep their consolidated gross fiscal deficit (GFD) within the FRBM limit of 3% for the third financial year in a row in FY20. But given the H1 data, that now looks really challenging.

According to the RBI study of state budgets of FY20, their combined GFD is projected to be 2.6% of the GDP in the year. The consolidated state GFD was 2.9% of GDP in FY19 (revised estimate) and 2.4% of GDP in FY18, the year which saw a sharp reduction in their deficits thanks to the guaranteed GST revenue that sort of insulated them from the slow growth in the country’s tax collections.

As FE reported earlier, the actual consolidated GFD of states in FY19 could be even lower than seen by the RBI, given that the data for 27 states showed that post-revised estimates, they cut expenditure sharply to contain their combined deficits at 2.5% of their aggregate GDP.

“Going forward, it is important for states to pursue their capital expenditure plans as budgeted in 2019-20, considering that states account for two thirds of the general government capital expenditure with implications for the overall economic activity and welfare,” the RBI had noted.

In a joint statement issued here on Wednesday, finance ministers of five states namely West Bengal, Kerala, Rajasthan, Punjab and Delhi said that due to the delays in release of GST compensation, their states were facing acute fiscal pressures, some even resorting to ways and means or even overdrafts.

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