Fiscal Situation of States
In India, the States mobilise altogether more than a third of total revenue, spend 60% of combined government expenditure, and have a share in government borrowing that is around 40%.
There have been significant post-pandemic fiscal corrections at the Union and State levels.
At the Union level, the fiscal deficit declined from 9.1% of GDP in 2020-21 to 5.9% in 2023-24 (BE).
All State fiscal deficit was 4.1% of GDP in 2020-21. It declined to 3.24% of GDP in 2022-23 (RE).
For the major States, for the year 2023-24 (BE), fiscal deficit is expected to be 2.9% of GDP.
According to the data collated from the individual Budgets of 17 major States.
The analysis shows that these States together have managed to contain their fiscal deficits.
States in aggregate managed to be fiscally prudent despite a significant contraction in revenues even during the peak of COVID-19.
Emergency provision for health spending and livelihood during the COVID-19 was not easy and required Union-State fiscal coordination.
States were able to reprioritise expenditure and quickly contain the fiscal deficit.
The reduction in fiscal deficit is a combination of expenditure-side adjustments, improved GST collection and higher tax devolution due to buoyant central revenues.
Non-GST revenues are also showing signs of recovery after the pandemic in most States.
The reduction in fiscal deficit has not been accompanied by a corresponding reduction in revenue deficit.
As in 2023-24 (BE), out of 17 major States, 13 States have deficit in the revenue account.
Out of 13 States, fiscal deficits in seven States are primarily driven by revenue deficits;
The States being Andhra Pradesh, Haryana, Kerala, Punjab, Rajasthan, Tamil Nadu, and West Bengal.
They also have large debt to GSDP ratios.
An assessment of successive Finance Commissions since the Twelfth Finance Commission identified three States, i.e., Kerala, Punjab and West Bengal, as fiscally stressed States.
The number of States that are now fiscally stressed has increased to seven (measured in terms of the level of revenue deficit).
To ensure higher State-specific growth, the fiscal stability of State finances is critical.
Some of these States have also been big drivers of public capital expenditures and favoured investment destinations of private investors.
Framework of revenue deficit consolidation
Focus back on the management of revenue deficit by creating an incentive compatible framework.
The following measures can be considered.
interest-free loans to the States by the Union Government, if continued, may be linked to a reduction in revenue deficit.
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