The ten dissenting states continue to insist that the Centre borrow the entire shortfall in GST compensation cess and perhaps the latest RBI report tells us why.
Of the states’ total revenue receipts of Rs 33.27 lakh crore budgeted for FY21, central transfers (including grants-in aid) account for a staggering 47 per cent at Rs 15.6 lakh crore.
Within this, central tax transfers from the divisible pool comprises a significant 25-29 per cent, which is why states want the Centre to bridge the shortfall instead of compelling them to borrow.
But given that a large shortfall in the divisible pool is highly likely in FY21, central tax transfers to states could fall by a significant margin, the central bank noted.
Interestingly, states maintained their gross fiscal deficit at 2.4 per cent for two consecutive years till FY19, thanks to higher tax devolution despite states’ revenue expenditure and capex witnessing a spike.
But now, the pandemic is threatening to have a bearing on intergenerational transfers and prompting lower discretionary spending or higher taxation.
Given that tax revenues fall faster than GDP when growth is negative, tax revenue is likely to be reduced for the next few years, RBI confirmed.
In its report titled State Finances: A Study of Budgets of 2020-21, RBI said states’ own tax revenue accounts for 45-50 per cent of the total revenue receipts, but Covid-19 dealt a severe ‘body blow’ to their finances.
Major heads such as taxes on commodities and services are bearing the brunt, while stamp duties, another major source of revenue under states’ direct taxes, could witness a shortfall given the contraction in construction, reverse migration of labourers and social distancing norms.
“Nonetheless, for additional revenues, 22 states/UTs increased their duties on petrol and diesel, while 25 states/UTs raised duties on alcohol. The consequent rise in petrol/diesel prices is in the range of 60 paise to Rs 8, while for alcohol, it’s in the range of 10-120 per cent on an average basis. This is expected to provide a revenue gain in the range of 0.03-0.35 per cent of GSDP. Petroleum and alcohol, on an average, account for 25-35 per cent of the own tax revenue of states,” the report further added.
States’ indebtedness is set to rise, and if it is not accompanied by an acceleration in growth, fiscal sustainability will become the casualty, overwhelming the modest gains of the prudence in recent years.
With anticipated market borrowings financing about 90 per cent of states’ fiscal deficit, states’ combined gross fiscal deficit may touch 4 per cent, higher than the budgeted 2.8 per cent of GDP.
Even though states too announced policy measures and financial support such as insurance cover for doctors and nurses, purchase of medical equipment, providing free food and others, monthly data on revenue expenditure during April-June 2020 show no significant increase compared to previous few years.