State finances improve, gross fiscal deficit declines 31.5%: RBI report

State finances showed improvement in 2021-22 as the consolidated gross fiscal deficit (GFD) of 26 states was lower by 31.5 per cent than a year ago.

The GFD declined mainly due to higher growth in revenue receipts (30.5 per cent in FY22) as against a contraction of 8.6 per cent in 2020-21, according to the Reserve Bank of India’s Annual Report for FY22. This is based on the information available for these states for April-February 2021-22

State government finances were budgeted to improve in 2021-22 with the GFD-GDP ratio narrowing to 3.5 per cent from 4.7 per cent in the Revised Estimates for 20-21.

Following the Centre’s move to reduce excise duty on petrol and diesel on November 3, 2021, a majority of the states cut their value-added tax (VAT) in the range Rs 1.8-10 per litre for petrol and Rs 2-to 7 per litre of diesel.

The revenue loss was more than offset by central transfers on account of goods and services tax (GST) compensation.

The Centre released Rs 1.59 trillion in 2021-22 to states as back-to-back loans. Apart from these loans, the Centre has released GST compensation of Rs 60,000 crore.

In addition to the regular instalment of tax devolution, the Centre released two advance instalments of in November 2021 and January 2022.

Despite the second wave of the pandemic and corresponding state-specific restrictions, the capital outlay remained robust. Higher revenue expenditure helped in strengthening economic recovery.

Thirteen states received permission to borrow an additional Rs 32,412 crore (till Q2, 2021-22) as an incentive for achieving the target set by the Ministry of Finance for capital expenditure.

The outlay under the “Scheme for Financial Assistance to States for Capital Investment” has been enhanced by the Centre from Rs 10,000 crore in the Budgeted Estimates to Rs 15,000 crore in the Revised Estimates for 2021-22, the Annual Report said.

The RBI report said based on the information available for 20 state governments, their combined GFD had been budgeted at 3.2 per cent in 2022-23 against 3.7 per cent in 2021-22 (Revised Estimates). There are significant variations among states.

Consolidation in the states’ fiscal position can be attributed to the revenue account as growth in revenue receipts is budgeted at a significantly higher level than revenue expenditure. This has resulted in a 55 per cent compression of the revenue deficit.

Following the recommendations of the Finance Commission, the Centre has allowed the states a fiscal deficit of up to 4 per cent of gross state domestic product (GSDP) in 2022-23. Of that 0.5 per cent will be tied to power sector reforms.