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Indian Economy

RBI’s Annual Report on State Finances

  • 29 Oct 2020
  • 4 min read

Why in News

Recently, the Reserve Bank of India (RBI) released its annual report on state finances.

Key Points

  • Covid-19 Impact: The double whammy (also termed as scissor effect) of the Covid-19 pandemica collapse in revenue and rise in health-related and other costs — is likely to have a significant impact on state government finances.
  • Fiscal Deficit: As most states presented their budgets before the onset of the pandemic, their budget estimates of deficits are unlikely to capture the true picture of the ongoing fiscal year (2020-21).
    • The average value of gross fiscal deficit to GSDP (Gross State Domestic Product) for the states which presented their budget before the outbreak of the pandemic is 2.4%, while the average for the remaining states that made post-outbreak budget presentations is 4.6%.
    • This indicates that the gross fiscal deficit of states is going to double for the 2020-21 period.
    • Fiscal Deficit is the difference between the total income of the government and its total expenditure.
  • Capital Spending: Capital spending by the states is going to be lower than budgeted levels this year. Also, States may treat capital expenditure as a residual element.
    • Lower spending is a result of states not being able to start a lot of projects due to the lockdown in the first quarter and monsoon in the second quarter.
    • Capital expenditure undertaken by states is generally treated as a residual and is prone to adjustment, conditional upon revenue generation.
    • Capital expenditure is the money spent on the acquisition of assets like land, buildings, machinery, equipment, as well as investment in shares.
      • It accounts for more than 60% of general government (centre + states) capital expenditure.
  • Tax Buoyancy: The implied tax buoyancy for 2020-21 is higher than budgeted on the basis of 2019-20 revised estimates.
    • Tax buoyancy is the ratio of change in taxes and GSDP (Gross State Domestic Product). Higher tax buoyancy implies that tax collection would rise at a faster pace for the same rise in incomes.
  • GST Revenue: States Goods and Service Tax (SGST), the component of the GST, which accrues directly to the states, would suffer the biggest hit.
    • SGST collections fell by 47.2% during the April-June 2020-21 quarter.
    • State receipts will also suffer because of a fall in the divisible pool of the Centre’s tax revenue.
  • Overall Impact:
    • 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.
    • Due to a surge in contingent liabilities (guarantees), state governments may have to put investment projects on hold.
    • To give a boost to aggregate demand, state governments are reducing various kinds of expenditure. These include deferment and deduction of salaries and allowances and rationalisation of travel and establishment expenses.

Source: IE

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