The combined fiscal deficit budgeted for FY20, although a bit higher at 2.9% , puts them in a comfortable position.
Although fiscal deficit has been a worry for the states in the past, RBI’s latest report on state finances, shows that they are well in the clear as far as fiscal condition is concerned. The combined fiscal deficit budgeted for FY20, although a bit higher at 2.9% , puts them in a comfortable position. More important, if one discounts for UDAY expenditure, it falls to 2.5%, or well within the recommendations of the NK Singh committee. But, all is not rosy—the report shows that there has been no reduction in the debt-to-GDP ratios, budgeted at 24.9. In fact, a closer look at the data reveals that there has been little change in states’ own tax and non-tax revenues. While the own-tax revenues are expected to be 6.7% of the GDP, non-tax revenues are stuck at a paltry 1.2% for the last many years. More worrisome, non-development revenue expenditures have been increasing over the last few years. If India is to become a $5 trillion economy, it cannot do so without the states increasing their revenues—both tax and non-tax—and curbing their non-development expenditures.
Besides, most states require a policy to contain debt, as fiscal prudence shall achieve little if it comes on the back of debt increase and fall in capital expenditures. A better idea, RBI itself suggests, would be to “balance aspirational policy choices against two major operating constraints: generating adequate revenue within the Legislative Framework and adhering to Fiscal Responsibility Legislations (FRLs).”