The states’ finances are going deeper into a crisis situation with a new Reserve Bank of India report now pegging average gross fiscal deficit of all states at 4.6 per cent of GDP in FY21, almost twice the level earlier budgeted for the year.
The alarming situation has been pushed by the Covid-19 pandemic that has sharply reduced states’ revenue while increasing the expenditure largely on pandemic relief measures.
“States have budgeted their consolidated gross fiscal deficit (GFD) at 2.8 per cent of GDP in 2020-21; however, the Covid-19 pandemic may alter budget estimates significantly, eroding the gains of consolidation secured in the preceding three years – the average GFD (gross fiscal deficit) for states that presented their budgets before the outbreak of Covid-19 is 2.4 per cent of GSDP, while the average for budgets presented post-lockdown is 4.6 per cent,” the 2020-21 version of RBI annual report on state finances said.
Before the the current fiscal and outbreak of the pandemic, states were on closures to fiscal consolidation, improving their finances while reducing deficits to close to 2 per cent of gross state domestic product (GSDP). A large part of improvement in state finances came from reforms carried out strengthen state power utilities and robust growth in GST revenues. But, economic disruptions unleaded by the pandemic has changed all that.
The RBI report gives a grim picture of states’ finances, giving a downside rise going forward.
“The associated increase in indebtedness, coupled with persisting losses of power distribution companies (DISCOMs) and rising guarantees, slants risks to state finances to the downside, going forward,” the report said.
Sustaining the recovery from the pandemic will reshape state finances, entailing boosting investment in health care systems and other social safety nets in line with the states’ demographic and co-morbidity profiles, the report said.
The next few years are going to be challenging for the states. Going forward, they need to remain empowered to provide growth impulses to the Indian economy and build resilience against future pandemics as well, the state finances report said.
With states in the frontline in the battle against Covid, the fiscal arithmetic for 2020-21 is likely to suffer. While the focus during the first few months of 2020-21 has been on managing the health crisis, it is the regional and spatial dimensions of structural features like demography, health care systems, migrant workers, digitisation and strength of the third tier which are likely to play an important role going forward in determining the fuller macroeconomic impact of the pandemic on state finances, the report said.