News Analysis

Rise in borrowing cap: Will States use additional ₹1.07-lakh crore for direct cash transfer schemes?

Rajalakshmi Nirmal | Updated on May 18, 2020

Sharp drop in VAT and excise revenues, higher healthcare expenses may persuade them otherwise

On Sunday, Finance Minister Nirmala Sitharaman, heeding to the repeated requests of Chief Ministers, permitted States to borrow up to 5 per cent of their GSDP for FY21 — against the current borrowing cap of 3 per cent — releasing additional resources of ₹4.28-lakh crore.

While all the additional borrowings cannot be put to use as States desire, 0.5 per cent of the GSDP (gross state domestic product) is available unconditionally; this works out to ₹1.07-lakh crore. This is more than the ₹75,000 crore which the Centre has budgeted for FY21 to be spent on PM-KISAN.

States, if they want, can use this funding tap opened by the Centre to announce a direct income transfer scheme.

Since the beginning of the lockdown, there has been a cry across social media for a cash transfer scheme. A cash/income transfer scheme is not going to be new for States — some already have such schemes running for their farmers.

In FY19, an income support scheme for farmers was announced for the first time, by Telangana. The next fiscal, per government records, six States — Andhra Pradesh, Haryana, Jharkhand, Karnataka, Odisha, Telangana and West Bengal — had budgeted a total of ₹32,861 crore for income transfer schemes for farmers. This came to 0.2 per cent of their collective GSDP.

How much for migrants?

Now, if ₹1.07-lakh crore is to be distributed, how much will it translate into income on hand?

If it is going to be split among migrant labourers, the count of which is approximately 8 crore, each individual will get ₹13,375. If States want to include all BPL (below poverty line) families under the scheme, the benefit paid per individual may be lower.

That said, it needs to be noted that the countrywide lockdown since March and the resultant hit on economic activities have seen cash flows dry up completely for States. They have witnessed a drop in the collection of VAT (mainly on petroleum and diesel) and State excise (on liquor) and also on stamp duty and registration fees on property sales. A report of India Ratings & Research points out that while about 40 per cent of the economy was functional even during the lockdown as activities defined as ‘essentials’ were allowed, and some amount of revenue did accrue, States faced a significant revenue loss in April.

Thus, the States may want to use the additional liquidity available for their various Covid-19 relief measures, and not necessarily on cash transfer schemes.

Fiscal health of States

States have been seeing their revenue growth slow down over the recent years. Per the RBI’s State Finances Report, the revenue receipts of States are likely to have grown at a slower pace in FY20 compared to the previous two fiscals. This is due to a drop in the rate of growth in both States’ own revenue (taxes including SGST and interest/dividend receipts) and Central transfers.

Capital receipts — made primarily of market borrowings — have increased sharply. Market borrowings as a percentage of GSDP have increased from 1.9 per cent in FY16 to 2.3 per cent of GSDP in FY20 (budgeted). Note that most of the States and Union Territories have been excluded from the National Small Savings Fund (NSSF) financing facility from FY17.

That said, States have cut their capital expenditure sharply and kept the GFD-GSDP (GFD is gross fiscal deficit) ratio within the limits of the Fiscal Responsibility and Budget Management Act (FRBM) Act. Under the FRBM Act, States are mandated to keep their fiscal deficit under 3 per cent of their GSDP.

Per the budgeted numbers for FY20, the GFD-GSDP ratio comes to 2.6 per cent, against the revised estimate of 2.9 per cent in FY19 and 2.4 per cent in FY18 (actuals).

Rise in outstanding debt

However, the outstanding debt of States has risen over the last five years and is likely to be at 25 per cent of GSDP for FY20, per the RBI’s State Finances Report, posing medium-term challenges to its sustainability. The FRBM Act prescribes a debt-to-GSDP ratio of 20 per cent for States.

The total outstanding liabilities of States in FY20 was ₹52.5-lakh crore, up from ₹27.03-lakh crore in FY15. In this period, the debt-to-GSDP ratio increased from 21.7 per cent to 24.9 per cent.

The States that have a substantially lower debt-to-GSDP ratio and have more room to announce cash transfer schemes include Gujarat (19.2 per cent), Assam (18.9 per cent), Karnataka (18.7 per cent), Maharashtra (16.9 per cent) and Telangana (17 per cent).

Published on May 18, 2020

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