UDAY scheme, pay revision challenges for state finances: ICRA

Implementation of UDAY scheme and pay revision of government employees will pose a challenge for the states in keeping their fiscal deficit below 3 per cent of GSDP in the coming years, says an ICRA report.
However, many states in current fiscal will be able to maintain the fiscal deficit below 3 per cent as prescribed by the 14th Finance Commission (FC).
The states, however, will face revenue deficit in 2015-16 despite higher devolution of central taxes by the Union as per the formula of the FC.
The ICRA report is based on the analysis of fiscal data from nine states of Karnataka, Kerala, Tamil Nadu, West Bengal, Punjab, Rajasthan, Gujarat, Maharashtra and Haryana.

As per the report, fiscal deficit of seven of the nine states, with the exception of Kerala and Haryana, would be in line with the recommendations of the 14th FC in 2015-16.
The 14th FC had suggested that fiscal deficit of states should be less than 3 per cent of Gross State Domestic Product (GSDP). It also recommended Centre should increase state's share in central taxes to 42 per cent from 32 per cent.

As regards the revision of pay scale by the state governments based on the report of 7th Pay Commission or their own pay panels, ICRA said it "would emerge as a fiscal challenge going forward".

Similar impact would be felt on the state finances on account of implementation of the UDAY scheme for financial restructuring of the discoms.
"Some states are likely to draw down their T-bill holdings in order to fund the fiscal impact of participation in the UDAY scheme as well as pay revision that they undertake going forward rather than necessarily maintaining their fiscal deficit below 3 per cent of GSDP.
Under the UDAY scheme, states are expected to take over 75 per cent of debts of discoms and a portion of the losses incurred by the power distribution companies. So far, 15 states, including Rajasthan, Punjab, Haryana, Maharashtra and Gujarat, have confirmed participation in the scheme.

"With less than 3 months remaining in 2015-16, it is likely that the fiscal impact of the state governments having to service the interest on their discoms' debts would be limited in the current year but would ramp up considerably from 2016-17 onwards," ICRA Senior VP JayantaRoy said.
The ICRA report further said that though the urban demand remain relatively stable, rural sentiments have been weakened by the sub-par monsoon rainfall as well as unfavourable start to rabi season. It may dampen state sales tax revenue.
Moreover, decline in retail prices of petrol, diesel and ATF are also likely to impact sales tax revenues.

"Overall, ICRA expects the pace of expansion of states' sales tax collections to be moderate in 2015-16, as compared to the combined growth of 11.9 per cent budgeted by the (nine) states," the report said.