The Ujwal Discom Assurance Yojana (UDAY), under which States took on the debts of electricity distribution utilities, has resulted in a deterioration in their finances, warns a report by the Reserve Bank of India (RBI).

“For the first time in more than 10 years, the GFD-GDP (gross state fiscal deficit to gross state domestic product) ratio at 3.6 per cent crossed the threshold of 3 per cent, but this was mainly due to the significant increase in capital outlay and loans and advances to power projects,” the RBI said in a report titled ‘State Finances: A Study of Budgets of 2016-17’.

Loans and advances to power projects increased significantly as an outcome of the UDAY scheme, which saw States take over 75 per cent of Discom debt as of September 30, 2015.

Covering a range of issues, the report also cautioned States against the dangers of increasing their liabilities by jumping onto the “bandwagon” of farm- loan waivers, noting that such measures would only add to their fiscal burden over the medium term.

“While these loan waivers could alleviate the immediate debt burden of financially distressed farmers, it is essentially a transfer from taxpayers to borrowers with an adverse bearing on the fiscal viability of States,” said the report.

GST best bet

The report, however, had a silver lining, noting that GST, which is likely to roll out from July, may help States claw their way back onto the path of fiscal consolidation. It pointed out that there is a cushion of compensation by the Centre for any loss of revenue during the initial five years. “The successful implementation of GST will result in additional revenue through simpler and easier tax administration,” said the report.

However, the outlook for revenue receipts of States could turn unpredictable due to the prevailing uncertainty about the revenue outcome from GST implementation, the RBI said.

The key issue is the determination of the revenue neutral rate (expected to be 15-15.5 per cent), which would ensure that the Centre and States do not incur any loss of revenue after GST implementation.

According to the report, one-off effects of GST on inflation, as evident from the cross-country experience, dissipated after a year of GST/Value Added Tax implementation in most countries.

Impact on inflation

“In the Indian context, the implementation of GST is likely to have a pass-through impact lasting 12-18 months on the inflation trajectory.

“This would eventually be moderated by reduction in supply-chain rigidities, transportation and production costs, which would accrue from the creation of a unified goods and services market post-GST,” the report elaborated.

The macroeconomic impact of introduction of the GST could turn out to be significant in the years ahead, given the dominance of the services sector in India, the report said.

Besides giving a major boost to tax revenue, the larger impact on fiscal health would be from reduction in the administrative compliance cost.

GST is likely to be supportive of fiscal consolidation without compromising capital expenditure.

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