The Reserve Bank of India’s report on the fiscal position of State governments from 2021-22 to 2023-24 has tried to highlight the positives such as reduction in consolidated fiscal deficit, elimination of revenue deficit and vast improvement in capital expenditure in FY23 and FY24. Yet, as the report acknowledges, the aggregate numbers conceal the poor fiscal management and accumulation of huge debt by many of the larger States. The suggestions in the report on ways to increase States’ own tax and non-tax revenue are well-intentioned, but absence of political will could hold up implementation of these ideas.
The report says that States have been fiscally prudent with gross fiscal deficit at a consolidated level controlled at 2.8 per cent of GDP for 2022-23, according to provisional numbers. This is under the 3 per cent limit prescribed by the fiscal responsibility legislation (FRL) and below the budgeted number of 3.2 per cent. But at a disaggregated level, many States including Bihar (9.2 per cent of GSDP), Himachal Pradesh (6.4 per cent) and Punjab (4.9 per cent) have recorded fiscal deficits far above the mandated levels for FY23. This trend continues in FY24, with 19 States budgeting gross fiscal deficit ratios above the 3 per cent FRL limit. This expansion in fiscal deficit is increasing the outstanding debt. Though consolidated debt of States, as percentage of GDP, is down to 27.6 per cent in FY24, from the pandemic highs of 31 per cent, it is still above the 25 per cent limit prescribed by the FRBM Act. Moreover, 25 States and Union Territories are expected to breach the limit this fiscal year. Growing debt can prove troublesome amidst increasing interest rates.
Besides, the deficit numbers for some States this fiscal could be higher than budgeted, due to optimistic revenue projections. The report says that all States have projected robust growth in revenue for FY24. This confidence is however belied by the actual numbers for the first half of FY24, which show slowing growth in revenue due to the high base. States should review their assumptions regarding tax buoyancy. Actual tax buoyancy of States has averaged 0.55 while that budgeted has been above 0.74 for the 13 States analysed by the RBI. While revenue management is a concern, States appear to be doing well in cutting back revenue expenditure and increasing capex spends. States’ spending on capital investments increasing 52.6 per cent in the first half of FY24 is a good augury for the economy.
The report rightly says that States are not doing enough to increase non-tax revenue. While mineral-rich States such as Odisha, Chhattisgarh and Jharkhand are getting a significant share of revenue from mining royalties, most others are heavily subsidising the utilities and not earning enough from other services provided by them. But it is doubtful if States will increase the fee, given the impact it would have on the electorate. The suggestion to improve tax administration and compliance in States is a good one.