For better housekeeping

Given the hiccups related to the introduction of GST, it is not surprising that revenue mobilisation of the States fell short of expectations in 2017-18. The Reserve Bank’s report on State finances, however, points out that the consolidated gross fiscal deficit (GFD) of States touched 3.1 per cent of the GDP last fiscal, both on account of “overshooting of revenue expenditure and shortfall of revenue receipts.” As the GST network stabilises, it is expected to have a salutary impact on the deficit this fiscal year, provided, of course, the States maintain a modicum of discipline in spending. The RBI report points out that the tendency of the States to announce loan waivers played a big role in throwing their finances out of gear — and such spending could well increase as the general elections draw closer. While the States have projected a GFD of 2.6 per cent in 2018-19, this target could come a cropper. On the fiscal impact of loan waivers, the report observes: “The total debt waiver granted during 2017-18 amounted to 0.32 per cent of GDP as per revised estimates...Total debt waivers are budgeted at 0.2 per cent of GDP during 2018-19.” The ratio of revenue to capital spending has increased since 2016-17, reversing five years of decline. While the rising revenue gap can be attributed to the pay panel award, States can offset this by improving tax collections, particularly with respect to real estate. A shift away from farm loan waivers to an investment grant model, pioneered by Telangana under the Rythu Banthu scheme, will create enduring benefits. Effective targeting of State welfare schemes through direct benefit transfers should help as well.

However, it must be said in support of the States that the 14th Finance Commission award (which raised the States’ share in the divisible pool of taxes from 32 per cent to 42 per cent) has been compromised by the slew of Central cesses. The RBI report observes that cesses increased from “9.3 per cent of gross tax revenues in 2014-15 to 14.2 per cent in 2018-19 (RE).” The States should not be denied their due share, in view of their commitments with respect to agriculture, education, health — and increasingly water and sanitation, whose share in the States’ social sector expenditure needs to increase sharply from the current level of 6-6.5 per cent. In a democratic set-up, States should have the space to pursue their own development schemes.

Borrowing costs of States have been rising — their bonds attracting a premium over Central yields. But it seems a bit of a stretch for the RBI to argue that the private sector could get ‘crowded out’ as a result. With bank credit offtake being poor, there is no evidence that credit has hit its limits. While the States need to pay some attention to their finances, alarmism is not warranted.

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