Money & Banking

States’ own tax revenues may decline by ₹3 lakh crore in FY21: SBI report

Our Bureau Mumbai | Updated on August 24, 2020

The Covid-19 pandemic has created a massive disruption in State finances,with States likely to witness a decline of ₹3 lakh crore in own tax revenue in FY21, according to the State Bank of India’s economic research department.

As per the department’s estimate, a very basic assumption of loss of an entire month’s revenue in components like State VAT (value added tax), excise, stamps and registration will bring down the revenue for Q1 FY21 at around ₹53,000 crore.

Combining this estimate with the loss in the SGST estimated in Q1 shows that major States are going to lose around ₹1.2 lakh crore in the first quarter itself, translating into an annual ₹3-lakh crore loss, the department said in its research report, Ecowrap.

“We estimate an additional ₹1.5-lakh crore revenue loss from Centre. Taking into account, the additional expenditure of States of ₹1.7 lakh crore, the total loss thus comes to around ₹6.2 lakh crore for the major states,” said Soumya Kanti Ghosh, Group Chief Economic Adviser.

Against this background, the report said the Centre has decided to accede to the request of the States and increase borrowing limits of States giving extra resources of ₹4.28 lakh crore.

GST compensation

The Department’s research suggests that only eightStates are in a position to fulfill all the conditions of the government, and can avail 2 per cent of GSDP as extra borrowing.

Hence, out of ₹4.28 lakh crore, it believes that only ₹3.13 lakh crore (73 per cent of the total available) might be actually borrowed by the State governments in FY21, keeping a uncovered gap of ₹3.1 lakh crore for States at this point of time.

“How this gap of at least ₹3.1 lakh crore can be bridged? In fact, the Central government has recently released GST Compensation for FY20 at ₹1.65 lakh crore.”

“To release the GST compensation for FY20, balance of cess amount collected during FY18 and FY19 was also utilised. So, the Centre does not have the cushion of past years’ funds, to even compensate for the shortfall in revenue owing to the GST,” Ghosh said.

Ghosh felt that one way to bridge the gap is a direct transfer of the combined full amount of ₹54,000 crore from the State Disaster Response Fund (SDRF) and the National Disaster Response Fund (NDRF).

Additional transfer

An endeavour should be next made to transfer at least 50 per cent of the remaining ₹2.5 lakh crore through further hike in WMA (ways and means advances) limits and supporting additional borrowing of States through open market operations by the RBI and relaxing some of the conditional ties associated with borrowing, he added.

“We must appreciate that the States are the most vulnerable as they have limited source of own tax revenue. The fund transfer to States will support also health, immediate payment to contractors for infrastructure work to reduce the stretched working capital cycle which will also have employment and demand boosting properties,” the report said.

The Department’s estimates show that out of 20 States there are 11, including Telangana, Haryana, Andhra Pradesh and Maharashtra, where PCI (per capita income) loss is more than the national average level.

The jump in PD (public debt) is at least 0.7 times that of the Centre for States like Maharashtra, Kerala, Haryana, Karnataka, Tamil Nadu and Karnataka, the report said.

“For the record, budgeted nominal GDP is likely to be now even lower than FY19 itself! We are thus in unprecedented times and we emphasise an immediate fiscal support for states in some form or the other!” Ghosh said.

Published on August 24, 2020

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