“The complicated pricing mechanism has resulted in rising farmer dues. The miller alone cannot be held responsible for this,” the report said.
If a slowing economy and burgeoning fiscal deficit are turning out to be a big headache for the NDA government at the Centre, states are not in a very happy situation either.
While the combined gross fiscal deficit of states between 2014 and 2019 averaged 2.5 per cent of the gross domestic product (GDP), a recent report by Moody’s suggests that this will go up to 3 per cent by the end of March next year.
The worry is that states may find it extremely difficult to rein in their fiscal deficits going forward because of the need to spend on infrastructure. Even a cursory look at the second-quarter GDP data, released by the National Statistical Office on November 29, makes it obvious that the core sector growth is in a shambles and unless infrastructure creation is given a priority it will be extremely difficult to come out of this rut. And here states can play a key role.
According to an RBI study, states, over the last five years, had been able to keep their fiscal deficits in check at the expense of “sharp retrenchment in expenditure, mainly capital expenditure”. Such a move has potentially adverse implications for the pace and quality of economic development.
At present, states employ about five times more people and spend around one and a half times more than the Centre. Moreover, public expenditure by states influences the quality of physical and social capital infrastructure of the economy, with higher multiplier effects.
Given the observation of the central bank of the country, the role of states in infrastructure creation can hardly be over emphasised. And this is where rating agencies are feeling worried. They are of the opinion that it may become challenging for states to balance the fiscal math while continuing to spend on infrastructure creation.
According to the Crisil Infrastructure Yearbook 2019, infrastructure investments by states need to rise to nearly Rs 110 lakh crore over the next decade (fiscal 2021-2030) – or 3.5 times of an estimated Rs 32 lakh crore in the current decade – if India is to achieve its mammoth infrastructure buildout targets. “Unless states contribute nearly 50 per cent of infrastructure investments, India’s build-out momentum could taper sharply. With private investments tepid in recent years, and fiscal limitations of central spending, states have been keeping public spending going. They will need to strengthen fiscal health and build institutional capacity to sustain far higher levels of capital expenditure,” says Sameer Bhatia, president, Crisil Infrastructure Advisory.
The big problem for states is that they remain reliant on the Centre’s transfers for their capital spending. Moreover, the introduction of the goods and services tax (GST) has vastly reduced their flexibility in tapping revenue resources. The introduction of GST replaced many indirect taxes previously levied by states, reducing the share of own source revenue in their total revenue.
As a result, states now rely on the Centre or the GST Council for a majority of their revenue, with variations across states. Moreover, GST revenue has been below expectations since its launch, though the Centre had agreed to compensate states for any revenue shortfalls due to the GST for five years. States are, however, complaining about delays in the release of GST compensation, which is pegged at around Rs 20,000 crore.
There is no doubt that the economic slowdown has affected the collection of indirect taxes. As a result, borrowing by states, during the current financial year, is likely to top the Budget estimates and put a strain on the combined fiscal deficit target for states. Moreover, as indicated by the RBI, the quality of state government expenditure has worsened in recent years with an increase in revenue spending. This trend is unlikely to reverse anytime soon.
Crisil identifies fiscal deterioration, institutional weaknesses and inability to scale up commercial financing and public-private partnerships as the key structural constraints that are inhibiting a sustained increase in spending by states.
It is obvious that states will have to balance aspirational policy choices (read capital expenditure) against two major operating constraints: generating adequate revenue within the legislative framework and adhering to fiscal responsibility legislations. Prudent fiscal housekeeping has to be, therefore, balanced with developmental and sustainability perspectives.
The key to an optimal mix is states’ own capacity to generate revenue coupled with adequate support from federal transfers so that states can absorb exogenous fiscal shocks in the form of schemes such as farm loan waivers, the Ujwal DISCOM Assurance Yojana (UDAY), farmer income support schemes and structural reforms such as the GST. And this balance has to be achieved in such a way that states’ finances remain sustainable over the medium-term.