RBI releases State Finances: A Study of Budgets of 2016-17

         

       Recent growth pattern in IIP (Base Year: 2004-05)                                                                                               (% growth)

  Weight in IIP April-March  2015-16 April-March 2016-17 Feb -17 Mar -17
Mining 14.1 2.2 2.2 3.3 7.9
Manufacturing 75.5 2.0 -0.1 -2.0 1.3
Electricity 10.3 5.7 4.7 0.3 5.8
Overall IIP 100 2.6 0.4 -1.2 -1.2
Reserve Bank of India (RBI) released the report entitled “State Finances: A Study of Budgets of 2016-17”, that provides information, analysis and an assessment of the finances of state governments. It is the primary source for disaggregated state-wise fiscal data and delineates the changing dynamics of fiscal federalism over the years. The theme of this year’s report is the Goods and Services Tax (GST).
The key highlights of the report are:
· Introduction of GST would have economy-wide ramifications in terms of growth, inflation, government finances and external competitiveness over the medium-term.
· It is likely to champion a new course for cooperative federalism in India, focusing on collaboration between the Centre and states.
· GST remains the best bet for state governments in returning to the path of fiscal consolidation without compression of productive expenditure.
· GST implementation challenges should be addressed through a robust dispute resolution mechanism; with the goods and services tax network (GSTN) expected to provide the necessary information technology (IT) infrastructure to all stakeholders.
· Greater devolution of resources through statutory transfers would provide states with the flexibility to prioritize their expenditure in sync with their development objectives.
· From a medium term perspective, debt sustainability of states is likely to be the key factor in shaping the evolving contours of state finances.
Fiscal Position of State Governments–The consolidated fiscal position of states deteriorated sharply during 2014-15 and 2015-16 (RE). Although states budgeted for an improvement in 2016-17 (BE), data for 25 states (RE) show some deterioration in fiscal position. Relaxations in market borrowings provided by the Fourteenth Finance Commission (FC-XIV) have allowed many of the states to mobilise additional resources. Despite the increase in the debt burden of the states in recent years, the overall fiscal position is found to be sustainable in the long run. Based on information pertaining to 25 states, the consolidated gross fiscal deficit to gross state domestic product (GFD-GSDP) ratio is budgeted to moderate to 2.6 per cent in 2017-18.
Major Deficit Indicators of State Governments (Rs. Billion)
 
Source: RBI, Note: Avg: Average RE: Revised Estimates. BE: Budget Estimates. Note: 1. Negative (-) sign indicates surplus. 2. Figures in parentheses are percentages to GDP. 3. The ratios to GDP at current market prices are based on CSO’s National Accounts 2011-12 series.
Goods and Services Tax: A Game Changer–The GST is likely to roll out on July 1, 2017. Given the cross-country experience and empirical evidence on efficiency gains from the Value Added Tax (VAT) in the Indian context, report added that implementation of GST is likely to ensure higher tax buoyancy and an improvement in government finances over the medium term
Issues and Perspectives–GST implementation brings several issues to the fore viz., determination of the revenue neutral rate, consensus on the divisible pool of resources, sharing the benefits of cesses, the administrative edifice and the technological platform. A dispute prevention mechanism would facilitate a smooth transition to the GST. The evolution in central transfers and evolving fiscal federalism will have a key bearing on the health of state finances over the medium term.
Way Forward–The fiscal position of state governments in India improved significantly since 2004- 05 after the implementation of fiscal rules through the enactment of Fiscal Responsibility and Budget Management (FRBM) Acts / Fiscal Responsibility Legislations (FRLs) and introduction of debt and interest relief measures by the Central Government. These initiatives were also supported by a favourable macroeconomic environment following the high growth phase and a reversal of the interest rate cycle in the mid-2000s. In the recent period, particularly during the last couple of years, signs of fiscal stress have re-emerged on the back of poor performance of state public sector enterprises (SPSEs). The recent initiative by several state governments of assuming additional debt liabilities as part of financial and operational restructuring of state power distribution companies (through issuance of UDAY bonds) has led to deterioration in fiscal health of states. This has been reflected in the worsening of key fiscal indicators. It is expected that states will take necessary steps to renew their efforts towards fiscal consolidation and reduce their liabilities.
The successful implementation of GST will result in additional revenue through simpler and easier tax administration, supported by robust and user-friendly IT systems. The GST is expected to reduce administrative costs for collection of tax revenue and improve revenue efficiency. Moreover, uniformity in tax rates and procedures across the country will economise on compliance cost. It will also lead to increase in the shareable pool of resources, resulting in larger central transfer to the states which, in turn, will enable them to undertake much needed developmental expenditure. Such an outcome would ensure debt sustainability for states in the long term. In fact, the GST is likely to set a new course for cooperative federalism in India by strengthening Centrestate partnership.
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