RBI says states' fiscal position "sustainable", deficit widens

There was deterioration in states' fiscal deficit in 2016-17 to 3.4 per cent, but the RBI termed overall fiscal position as "sustainable" in the long run, counting on the GST as a big positive for finances.
"Despite the increase in the debt burden of the states in recent years, the overall fiscal position is found to be sustainable in the long run," RBI said in its annual report on state finances.
In the revised estimates for FY17, the consolidated gross state fiscal deficit (GSFD) shot up to 3.4 per cent of GSDP against the budgeted 3 per cent.
In FY16, the GSFD came at 3.6 per cent after revised estimates against a budgeted estimate of 2.6 per cent.

A bulk of the widening was attributed to the Uday Bonds under which ailing electricity discoms were bailed out, and the RBI said excluding the Uday impact the GSFD would have been 2.7 per cent.
The consolidated GSFD is estimated to go down to 2.6 per cent in FY18, it said.

Data from 25 biggest states was used to arrive at the figures, and those excluded include Punjab and a few states in the north east.
It can be noted that analysts recently raised concerns over the states' increasing fiscal deficits, even as the Centre limits its number.
The RBI said the introduction of Goods and Services Tax (GST) will be one of the biggest advantages for the states as they seek to narrow down the GSFD.

"Due to prevailing uncertainty about the revenue outcome from the GST implementation, the outlook for revenue receipts of states could turn uncertain. There is, however, the cushion of compensation by the Centre for any loss of revenue for the initial five years," it said.
The report pointed out that the risk of pay hikes following implementation of seventh pay commission by the Centre and "ad-hoc" debt waivers for farmers are potential risks.
In a first, the RBI also came up with commentary on debt sustainability.
"Empirical assessment of the inter-temporal budget constraint in a panel data framework covering 20 Indian states for the period 1980-81 to 2015-16 indicates sustainable debt position of states in the long run," it said.

The broad way of examining a state's sustainability is to compare the cost of borrowing with the GSDP growth, and as long as the GSDP growth number is higher, there is no cause of worry, it said.
However, even as the GSFD is widening, the RBI said capital expenditures do not appear to have been affected.