Money & Banking

‘Economic slowdown can debilitate revenue-raising capacity of States’

Our BureauMumbai, September 30 Mumbai | Updated on September 30, 2019 Published on September 30, 2019

The slowdown in the economy can debilitate the revenue-raising capacity of States and force an increase in borrowing/future liabilities, cautioned a Reserve Bank of India study on State finances. In this regard, the study referred to the downward rigidities confronted by States under various expenditure heads, still underwhelming revenue performance of the Goods and Services Tax (GST) regime, and the shrinking financial autonomy that they face.

“The current slowdown in the economy is likely to have implications for tax devolution to States.

“The corporate tax and GST rate cuts, while are important to boost investment, may result in revenue loss for States in 2019-20, if not compensated by States’ own efforts towards revenue mobilisation,” the study said.

The study assessed that narrowing balance sheet of States is paradoxically associated with a rise in debt and guarantees of State Public Sector Enterprises (SPSEs). The risk of crystallisation of these contingent charges on States’ finances has direct adverse implications for debt sustainability in the medium-term, the report said.

According to the study, the weak performance of SPSEs, particularly in power distribution, continues to be a source of fiscal risk, going forward, if the off-budget liabilities get crystallised. Further, the increased orientation of State government borrowings towards markets brings attendant challenges of pricing, liquidity, management of redemption cycle and diversification of investor base.

The debt position of State governments has started showing incipient signs of unsustainability, particularly post UDAY (Ujwal Discom Assurance Yojana). Recognising that debt sustainability is closely linked to revenue generation of States, the study suggested that they will have to improve their revenue-raising capacity by capitalising on the efficiency gains under the GST and digitisation and improving compliance. Also, turnaround of power distribution sector is crucial to avoid fiscal surprises going forward.

Pointing out that the debt liabilities of States rose during 2016- 19, the study said these liabilities are likely to remain around 25 per cent of GDP in 2019-20, clearly making the sustainability of debt the main medium-term fiscal challenge for them.

Michael Debabrata Patra, Executive Director, RBI, said: “States must not compromise on their social and capital expenditures; they have profound macroeconomic and social implications as evident in the slowdown in economic activity in India, which is leading and coincident with the cutback in spending by States.”

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Published on September 30, 2019
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