Statsguru: Rough terrain for states amid slowing economy hit by Covid-19

The recently released Reserve Bank of India (RBI) report on the financial situation of Indian states underlined the massive challenges that lie in their path. The pandemic has significantly increased difficulties for state governments.

In FY20, provisional accounts indicate that states’ revenue receipts were 12 per cent lower than the Budgeted amount, shows chart 1. 

The year was only marginally impacted by the pandemic, but the economy was slowing down. However, states audaciously budgeted for a 20 per cent revenue growth in the current year.

At the same time, states are relying more on guarantees to public sector enterprises they own — such as power generation and distribution companies, and water resources utilities. States have pledged guarantees to the tune of Rs 0.9 trillion this year, which will take the outstanding contingent liabilities to 3.4 per cent of gross domestic product (GDP) by the end of FY21. This shows the increasing dependence of states on guarantees.

With the Centre's taxes declining by 32 per cent in the first half of FY21, states’ share this year would be considerably lower than the Budget estimate. But many states have increased taxes on petrol, diesel and alcohol, shows chart 3. That will help them recover revenues worth 0.05-0.35 per cent of GDP, reveals chart 4. Though this will not cover the entire revenue shortfall, it would certainly provide some cushion.

Apart from devolution, the Centre also provides financial support to states to counter revenue deficits. On that account, many states are seeing increased cash flow, further helping them manage the current turmoil (chart 5).

The crucial bit for government finances will be the overall economic recovery. Chart 6 shows how many states stopped economic activity to arrest the spread of Covid-19, and the subsequent revival after relaxations. The RBI report suggests that despite a nationwide lockdown, economic activity in Maharashtra was not fully suspended, while Kerala and Karnataka were shut in April and May. Economic activity started regaining traction in July, but tapered in August. September showed a stronger revival. Continued momentum would be key for financial stability of states.

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines. Source: BSE, NSE, SEBI, NSDL, Compiled by BS Research Bureau