Covid-19 to ‘significantly’ impact state finances, says RBI

The report expects capital spending by states to be lower than budgeted this yr

The double whammy of the coronavirus disease (Covid-19) pandemic — a collapse in revenue and rise in health-related and other costs — is likely to have a significant impact on state government finances and the challenges from the economic shock will persist for the new few years over which states will play a crucial role in India’s recovery, according to the Reserve Bank of India’s (RBI) annual report on state finances released on Tuesday.

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, the report says.

The average value of gross fiscal deficit as a share of gross state domestic product (GSDP) 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%.

The report expects capital spending by states to be lower than budgeted this year. While part of this is likely to be 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, the report says that states have a tendency to treat capital expenditure as a residual element.

“Capital expenditure undertaken by states, which accounts for more than 60 per cent of general government capital expenditure is generally treated as a residual and is prone to adjustment, conditional upon revenue generation. In 2017-18 and 2018-19 as well, capital spending was reduced from budgeted levels,” it adds.

The economic impact of the pandemic is likely to have a major revenue impact on state finances.

The RBI report says that the implied tax buoyancy for 2020-21 (based on 2019-20 provisional accounts) is higher than budgeted on the basis of 2019-20 revised estimates and much higher than the previous year average.

Tax buoyancy is the ratio of change in taxes and GSDP. Higher tax buoyancy implies that tax collection would rise at a faster pace for the same rise in incomes.

SGST, the component of the Goods and Service Tax (GST) which accrues directly to the states, would suffer the biggest hit, the report says. SGST collections fell by 47.2% during the April-June quarter of the current fiscal year, the report says.

To be sure, the decline moderated to 6.4% in the July-September quarter. State receipts will also suffer because of a fall in divisible pool of the Centre’s tax revenue, it adds.

The report also notes that state governments have taken their own set of measures to give a boost to aggregate demand.

A conservative estimate — not all states have explicitly quantified their support measures — puts the fiscal outlay on such policies at 0.3% of GDP.

Additional spending on such items has been compensated by cutting back on other kinds of expenditure.

These include deferment and deduction of salaries and allowances and rationalisation of travel and establishment expenses.

REPORT SAYS CHALLENGES FROM THE ECONOMIC SHOCK WILL PERSIST FOR THE NEW FEW YEARS OVER WHICH STATES WILL PLAY A CRUCIAL ROLE IN INDIA’S RECOVERY