High debt of states to be a challenge: Fifteenth Finance Commission
Low revenue collection and increasing debts of states, amid reduced revenue deficit grants for them, is likely to worsen their fiscal health, posing another challenge for the Central government struggling with an economic slowdown. The Fifteenth Finance Commission (FFC), which tabled its report on February 1, has warned of slower revenue collection from the states.
“The Finance Commission grants – including revenue deficit grants, grants for disaster relief and grants to local bodies – are binding expenditures for the Union government; considering sluggish trends in tax collection, the requirement for GST compensation will be high; and reduction in schematic transfers will constrain the state budgets, especially in a year of revenue strain,” the commission said in its report.
According to the report, tax buoyancy will remain muted for states. “Considering that the recent slowdown in economic activity is affecting non-GST collections, the states’ tax buoyancy (GST and non-GST) is assessed at a uniform 1.16 per cent with respect to GSDP from 2018-19 to 2020-21. This is consistent with the implied buoyancy of GST for these three years, combined with the assumption of buoyancy marginally above 1 per cent for non-GST taxes,” FFC report said.
The Economic Survey echoed the view. “The year 2020-21 is expected to pose challenges on the fiscal front. On one hand the outlook for global growth persists to be weak, with escalated trade tensions adding to the risk; on the other, the pace of recovery of growth will have implications for revenue collections,” chief economic advisor Arvind Subramanian warned in the survey, adding that revenue buoyancy of GST would be “key to the resource position of both Centre and states”.
This is going to be challenging for the states, given that the finance ministry has more than halved the post-devolution revenue deficit grant for them recommended by the FFC, from Rs74,340 crore in 2019-20 to Rs30 ,000 crore for 2020-21. As the outstanding liabilities of states have ballooned over the years to Rs52,58,469 crore in 2019-20 from Rs27,03,760 crore in 2014-15, lower revenue deficit grants could raise borrowing requirements by deficit states to meet their recurring, non-asset-creating expenses.
Rs 74,340 cr revenue deficit grant recommended by FFC to be given to states in 2019-20.
Rs 30,000 cr revenue deficit grant approved by the Centre to states for 2020-21.
Bone of contention
In the last few months, the delayed disbursement of GST compensation has been a matter of contention between the Centre and states.