India’s state government revenues have been laggard in comparison to the central government, even as the economy opens up following the pandemic-led lockdowns in 2020, experts said. While tax receipts for the central government have been nearing a record high of 2008 levels in the first nine months of FY 2021, tax receipts for the state were at a decade low, similar to 2020 levels, ie the pandemic year, according to a report by Motilal Oswal. With the shortfall in revenues expected in the current fiscal, state governments may ask the central government to extend the GST compensation provision for another five years.
Lack of revenues result in reduced spending by the states, ie swollen fiscal deficits, which can have “non-trivial consequences for the economy,” Motilal Oswal said. “Total spending by states in 9M FY22 was 15% of GDP – the lowest in eight years and down from 16.3% of GDP in the pre-COVID period,” Motilal Oswal report added. While SBI Research said the fiscal situation of states is a “collateral casualty of pandemic” adding that it has upped fiscal deficit by 50 basis points to 4 percent for FY 2022.
The central government’s tax receipts were at 8.6 per cent of GDP in the first nine months of FY 2022, similar to the record high of 8.8 per cent clocked in FY 2008. At the same time, the tax receipts of states were only 8.7 per cent of GDP in the first three quarters of FY 2022, similar to that in preceding fiscal, which was at a decade low, Motilal Oswal said in a report. This means that while the centre’s resources have improved tremendously, states are lagging behind with total receipts at the lowest in two decades.
“States want the Union Government to pay the GST compensation for an additional five years (post Jun’22) to help them tide over the financial stress triggered by the pandemic,” according to a SBI Research report. When the Goods and Services Tax was introduced by the government, the centre had provided states with a guarantee to compensate them for any loss of revenue in the first five years of GST implementation ie from 2017’ to 2022. The situation has been complicated initially by the pandemic and now the Ukraine Russia war.
Motilal Oswal said as the end of GST revenue protection from the Center is coming to an end in June this year, things could become difficult for states in the immediate future.