States Of Uncertainty

Context: Centre should increase tax devolution to states, ease spending.

Unhealthy state of States’ finances:

  • High fiscal deficit:The State Development Loan  (SDL) bonds issued by RBI (predominant source for state governments to raise money to finance fiscal deficit) has increased to Rs 8 trillion, up from Rs 6.3 trillion in the previous year.
  • Reduced borrowings: 
    • Gross issuances of bonds stood at Rs 1.4 trillion. This amount is 14 per cent lower than the bonds issued last year (Rs 1.7 trillion).
    • This is also around 20% lower than what states had initially indicated they would borrow (Rs 1.8 trillion)
    • Lower state borrowings were a consequence of three factors:
      • An additional tax devolution of Rs 450 billion from the Centre in late March.
      • A record-high GST collection in April – GST collection increased to Rs 1.3 trillion in the first quarter of this year, up from Rs 0.6 trillion in the same period last year.
      • Receipt of substantial grants from the Centre adding up to Rs 436 billion in April-May related to the recommendations of the Fifteenth Finance Commission.
    • RBI pegs states market borrowing at Rs 1.7 trillion, or 9% lower than the amount raised over the same period last year.

Factors leading to state wise differences in borrowings: There are some critical factors that may lead to state-wise differences, especially in the magnitude of their borrowings.

  • With the varying pace of unlocking and the consequent economic revival in states; A faster ramp-up of vaccine administration may reduce the need to borrow.
  • Back to back loans by the GoI to compensate states for the loss in their GST revenues could also result in a change in the states’ borrowing schedule.
  • The quantum and timing of tax devolution will also play a role: Central tax devolution forms a quarter of states’ combined revenue receipts; however, it has contracted by 15%, falling to Rs 392 billion each in April-May this year, from Rs 460 billion last year.

Conclusion: An early step-up in tax devolution by the central government may provide comfort to the states to accelerate expenditure during another uncertain year without borrowings being pushed up in the next two quarters.