The Reserve Bank of India’s recently released study of state finances points to a sharp recovery in the fiscal condition of states after Covid threw their finances out of gear. This was primarily on account of an improvement in revenue collections. On the expenditure side, the quality of spending has shown a welcome shift in favor of capital expenditure. As a result, the states’ fiscal deficit is expected to decline from 4.1 per cent of GDP in 2020-21 to 3.4 per cent in 2022-23.
But this optimism can be called into question on three counts: the accuracy of the states’ estimates of own revenue collections, as observed by RBI; the shift by some states towards the old pension system; and the fact that 10 states are fiscal outliers. To take the positives first, rising nominal growth has lifted all heads of revenue. Between FY21 and FY23 (projections for the current fiscal), own State revenues are projected to rise nearly 50 per cent to ₹17.8-lakh crore, while the States’ share of GST revenues is expected to rise about 38 per cent to ₹8.3-lakh. lakh crore. Even if the first set of figures cannot be taken at face value, they do point to an uptick. The expenditure of States rose 40 per cent over this period to ₹47.6-lakh crore. States’ own revenues account for half their total kitty, with Central tax transfers and grants (roughly equal to the fiscal deficit) making up the rest, the latter accounting for nearly 25 per cent. At a time of rising interest rates, the net market borrowings of States is likely to fall sharply from ₹4.92-lakh crore in FY22 to ₹3.02-lakh crore this fiscal. However, revenue buoyancy may be as nominal growth falls from current tested 15 per cent levels.
The rise in capex in the form of social and physical infrastructure creation is notable. The RBI notes that the States’ capital outlay to GDP ratio is expected to rise to 2.9 per cent in FY23 from 2.3 per cent in FY22 (the Centre’s share being 2.5 per cent). However, spending is backloaded for the latter part of the year, as a result of which planning suffers.
However, 10 States identified by an earlier RBI paper (Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana) have an interest payment to revenue receipts ratio of 10 per cent or above, and a revenue to capital expenditure ratio that exceeds five in most cases. Expenditure on interest payments, pensions and administrative expenses, accounts for over 35 per cent of the total revenue expenditure in states like Haryana, Uttar Pradesh, West Bengal, Kerala and Punjab, leaving limited fiscal space for undertaking developmental expenditure. According to CAG data, the state governments’ expenditure on subsidies has grown at 12.9 per cent and 11.2 per cent during 2020-21 and 2021-22, respectively. Finally, the switch by some states to the old pension system is a big cause for worry as the deleterious effect on state finances will be felt by the next generation.