States have started fiscal consolidation process, says NIPFP paper

4 Aug 2022 , 02:12 PM

A working paper by the National Institute of Public Finance and Policy indicates that Indian governments have resumed the road of fiscal consolidation following the epidemic, and success in meeting income and spending objectives for the current financial year could help them contain deficits and debts.

According to Sacchidananda Mukherjee, an associate professor at the institution in New Delhi, “after two years of fiscal crisis, states have again begun pursuing the road of fiscal consolidation by enhancing revenue collection and controlling spending.”

He noted that while states have set conservative goals for revenue mobilization, the total revenue side of their budgets appears reasonable given the growth projections for gross state domestic product in the current fiscal year.

As the epidemic slowed down economic activity and reduced revenue collections during the past few years, states’ budgets have been under considerable strain. The combined budget deficit of 18 main states increased from 2.56 percent of the total GSDP in 2019—20 to 3.89 percent in 2020—21, although it is anticipated to decline to 3.29 percent this fiscal year from 3.39 percent the year before.

Meanwhile, it is predicted that the combined public debt of these states would increase to 23.93% this fiscal year from 23.66% last year, 20.53% in 2019—20, and 19.66% in 2018—19. Since revenue mobilization has improved with rising economic growth, states have been able to increase their spending in the most recent fiscal year.

The previous two fiscal years saw some cushioning for state budgets as they continued to receive GST compensation, which helped them keep fiscal deficits in check. In addition, during the 2020—2021 and 2021—2022 fiscal years, the Center provided back-to-back loans to the States in place of any deficiency in the GST Compensation Fund, which assisted the States in containing public debt.

Twelve states, fearing a probable income shortage, have asked for an extension of the GST compensation beyond the deadline of June 30 this year. While acknowledging their idea, the Centre has not supported such a concession. To pay back the exceptional borrowings made over the previous two fiscal years to make up the shortfall in GST cess revenues, the GST compensation cess has been extended until March 2026.

The NIPFP research finds it interesting that states have considered the financial effects of the termination of the GST compensation system in budget projections for the current fiscal year. It said, “The effect of the GST compensation regime’s termination on state budgets would differ among states and rely on state-specific reliance on GST compensation to pay projected expenditures.