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States living beyond their means, need to rationalise spending: SBI Ecowrap

States living beyond their means, need to rationalise spending: SBI Ecowrap

It added that many states are offering freebies such as loan waivers and restoring old pension systems, which are not economically sustainable given the bad shape of many states. 

How states' finances have shaped up How states' finances have shaped up

State Bank of India’s research report, Ecowrap, on Monday, stated that states are living beyond their means and it is imperative for them to rationalise spending priorities in accordance with revenue receipts. It added that many states are offering freebies such as loan waivers and restoring old pension systems, which are not economically sustainable given the bad shape of many states. 

“For example, Telangana has committed 35 per cent of revenue receipts of the state to finance several populist schemes. States like Rajasthan, Chhattisgarh, Andhra Pradesh, Bihar, Jharkhand, West Bengal and Kerala have all committed to spend 5-19 per cent of their revenue receipts on such schemes. In terms of percentage of state own tax revenue, this is as much as 63 per cent for some of the states,” it added.

The SBI Ecowrap stated that the fiscal situation of the states appears to be a collateral casualty of the pandemic. A comprehensive analysis of finances of 18 states demonstrated that the average fiscal deficit as percentage of GSDP has been revised upwards by 50 bps to 4.0 per cent for FY22, with six states reporting more than 4 per cent of GSDP. “Fiscal deficit of seven states exceeded their budgeted target though 11 states have been able to keep their fiscal deficit equal to or lower than their budgeted numbers during FY22,” it added.

Bihar with 8.3 per cent of GSDP and Assam with 4.5 per cent of its GSDP exceeded their fiscal deficit significantly as per RE FY222. Arunachal Pradesh, Jharkhand, Kerala, Maharashtra and Rajasthan too have higher fiscal deficit than their BE.

“For FY23, states have budgeted lower fiscal deficit of 3.4 per cent with combined fiscal deficit for these 18 states projected at Rs 7.2 lakh crore, though the group numbers seem shrouded in uncertainty given the constraints in receipts, adherence to fiscal discipline and hyper adventurism embraced by a select few,” it added.

States like Andhra Pradesh, Assam, Gujarat, Haryana, Maharashtra, Rajasthan, Telangana and West Bengal show real GSDP growth to be much higher than the overall GDP growth of the country even as overall growth for 17 states is slightly lower than India’s real GDP growth. “There has always been a gap between India’s GDP and GSDP given by the States and UTs,” the report stated.

The Ecowrap added that capex in FY22 grew by 36.2 per cent due to the need to upscale health infrastructure in the face of the pandemic. Capex outlays for urban development, water supply and sanitation, irrigation and transport also increased. Driven by a significant slowdown in capex and compressed revenue spending, states’ total expenditure is budgeted to increase moderately in FY23.

Committed expenditure of states has increased 6 per cent in FY23 budgeted figures, salaries component by 6.8 per cent, interest payments by 8.7 per cent and pension payment by 12.2 per cent. “Incidentally, a larger proportion of the budget allocated for committed expenditure items limits the state’s exibility to decide on other expenditure priorities such as developmental schemes and capital outlay,” it added.

The economic slowdown driven by the pandemic ensured a shortfall in GST cess collection in FY20, which further increased to FY21. 

“In Oct’20, the Union Government decided to borrow Rs 1.10 lakh crore from the market in lieu of compensation cess for shortfall in their revenue in FY21. Apart from Rs 1.10 lakh crore compensation, the Centre had also provided Rs 0.91 lakh crore to states out of the GST compensation fund in FY21. Most states want the Union Government to pay the GST compensation for an additional five years (post Jun’22). As for some of the states, the GST compensation as % of state’s tax revenue is more than 20 per cent”, it added. 

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