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The overall fiscal outlook for States remains favourable in FY24, with adequate fiscal space for undertaking higher capital expenditure, in view of the resilient domestic economic activity and their consolidation efforts, according to an RBI report.
On the revenue side, even though the growth in tax revenue during H1 (April-September) 2023-24 at 14.6 per cent is marginally lower than the budgeted 17.9 per cent, it is expected to improve during H2 (October-March) 2023-24 due to a favourable base and continued robust GST collection, per the report “State Finances: A Study of Budgets of 2023-24”, put together by RBI officials.
Leave States to fix their own fisc
Revenue expenditure
On the expenditure side, growth in revenue expenditure during the year so far (H1:2023-24) at 8.9 per cent is much lower than the full-year budget estimate of 18 per cent and provides space for undertaking higher capex, while persevering with fiscal consolidation, RBI officials said.
The debt-GDP ratio of States peaked at 31 per cent at end-March 2021 and declined to 27.5 per cent by end-March 2023, supported by fiscal consolidation. At the individual level, the debt-GDP ratio for some States remains high.
At a disaggregated level, the debt to GDP ratio could exceed 25 per cent (average of debt-GDP ratio from 2015-16 to 2019-20) as at end-March 2024 (BE) for 25 States/ UTs.
Reversion of OPS
The officials said reversion to the old pension scheme (OPS) by a few States and some States budgeting for fiscal deficit exceeding 4 per cent of GSDP (gross state domestic product) in FY24 pose challenges to fiscal sustainability over the medium term and need to be addressed.
The report highlighted that around 79 per cent of SGS (State government securities) will mature during next 10 years, implying higher rollover risk for State governments.
The officials suggested that own tax revenue to GSDP ratio of the States, which has stagnated around 6-7 per cent in the last decade, can be enhanced by the introduction of new taxes, rationalisation in the rates and bases of existing taxes, and improvement in tax administration and collection.
Tax mop-up
In direct tax collections, they underscored that the States can raise more revenues through higher stamp duty and registration fees, as pointed out by the Fifteenth Finance Commission (FC -XV).
The report noted that among indirect taxes, States Goods and Services Tax (SGST) collections, which account for more than 40 per cent of own tax revenue, have improved in recent years. In this context, a reduction in the number of slabs, along with adjustments in rates, can improve efficiency and collection.
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The officials observed that there is also significant scope for mobilising resources through non-tax revenues, which have remained around 1 per cent of GDP in the last 10 years and pale in comparison to a ratio of 10 per cent or more in countries such as Singapore, Egypt and Iran.
The most important non-tax revenue sources are: (i) lease/sale of natural resources, like minerals; (ii) user charges on economic/social services provided by the government such as irrigation, electricity, health, education, forestry and wildlife; (iii) lotteries; and (iv) interest receipts from loans extended to entities like public sector undertakings (PSUs) and local bodies.
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