State finances hit by UDAY; GST will help recover losses: RBI study

Finances of several states are worsening after they took over the debt of their electricity distributors under the Centre’s Ujjwal Discom Awas Yojana (UDAY) initiative, says a Reserve Bank of India (RBI) study released on Friday.

Additional provisions that states may have to make for UDAY, increased calls for farm loan waivers, and potential pay hikes for state government employees, are other pressure points on state finances, the report said.

In this context, implementation of the goods and services tax (GST) is crucial, given that the centre will compensate states for any loss of revenue in the initial five years after the switch-over to the new tax regime, it said.

For fiscal 2016-17, the revised figures for 25 states show that the consolidated fiscal deficit to gross state domestic product ratio (CFD-GSDP) is 3.4%, compared to the budgeted 3%. An increase in capital outlay and loans to power projects under UDAY worsened fiscal indicators. Excluding UDAY, the CFD of these states would have been 2.3% of GSDP, the report said.

For FY18, the central bank expects an improvement in the consolidated GFD-GSDP ratio to 2.6%, compared to the Centre’s budgeted 3.2%.

It, however, cautioned that state liabilities may increase going forward.

Apart from UDAY liabilities on their books and farm loan waivers, the RBI study said additional provisions under UDAY to provide working capital for electricity distributors, and state government guarantees towards public sector enterprises could also increase states’ debt.

“In terms of general government finances, the Centre’s efforts to carry forward fiscal consolidation could be squandered unless state finances are shored up and strengthened,” the report said.

The panel had recently recommended that debt-to-GDP ratio be made the anchor of fiscal policy. It said that by fiscal 2023, the debt-GDP ratio for India should be capped at 40% for the Centre and 20% for states.