A Union of Fiscally Feeble States

Context:  The latest report on state budgets, brought out by the Reserve Bank of India (RBI), has shown how most states have curtailed their expenditure to stay within the fiscal deficit limits.

Issues faced by the States: According to the RBI report

• Sharp cut of both revenue and capital expenditure: Such expenditure contraction may lead to a cyclic slowdown.

• According to provisional accounts, their revenue fell by 6% while the fall in revenue expenditure was 11% and capital expenditure was 14%

•  Deterioration in the state budgets’ discipline:

• On revenue side: In 2018-19, the combined fiscal deficit of the states was down to 2.4%, compared to 2.9% shown in the revised estimates. 

• On the expenditure side: Revenue expenditure was lower by over 6%.

• Size of the state budgets is growing at a slower pace than that of the Union budgets: 

• Reason: Due to slower than expected revenue growth due to the goods and services tax (GST) and the consequent expenditure squeeze.

• For. E.g. In 2016-17, the state budgets were more than 33 % of the Union budget while in 2019-20, the size of the state budgets was only 24 % more than the size of the Union budget.

• Critical impact: on sectors such as healthcare, infrastructure and skilling as well as education 

Conclusion: Since the central transfers to the states are under the squeeze, the states must explore newer avenues of raising resources to keep their expenditure plans intact.