The Reserve Bank of India (RBI), in its report, State Finances: A Study of Budgets of 2019-20, noted that the state governments have improved their fiscal position but at the expense of cutting capital expenditure.
- As per the report, the state governments’ fiscal position is within the limits of Fiscal Responsibility and Budget Management laws, but this was possible due to cut in their capital expenditure.
- The fiscal deficit is within the range of 3 per cent of Gross Domestic Product (GDP) as per the FRBM Act.
- For 2019-20, the states have a consolidated Gross Fiscal Deficit of 2.6% with revenue surplus as against revenue deficit in the last few years.
- This indicates retrenchment in capital expenditure which is not a good sign.
- It will lead to an adverse impact on economic development.
- State governments employ five times more than the central government and spend one and a half times more. Public expenditure is thus necessary for quality physical and social infrastructure.
- The reports recommend that state governments must apply strategies to increase revenues through efficiency gains rather than increasing tax rates.
- Further, it notes that unless the states pick up revenues, they will be forced to cut capital expenditure which is detrimental for the economy. It becomes a vicious cycle.
- The states are facing uncertain revenue prospects due to low tax buoyancy, loss of autonomy due to GST, unpredictability associated with transfers of IGST and grants.
- Coupled with unrealistic revenue forecasts, the states are cutting capital expenditure even on heads that generate good revenues.
- The advised states to harness the GST database, rationalize tariffs related to power and irrigation by keeping in mind the break-even user charges.
- The report also noted that the outstanding debts of states have also risen to 25% over the last five years and pose medium-term challenges to sustainability.
- It warned the states of off-budget guarantees becoming liabilities and posing a risk to their debt sustainability.
States must act fast on the suggestions of the report. Cutting capital expenditure to reduce fiscal deficits might be a short-term strategy but it will have a huge impact on the local economy. Instead, states have to heed the suggestions of the report and augment their revenues through efficiency gains be it in power, irrigation, and other user charges.