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Slide in states' fiscal position; capital outlay to grow slower, says RBI

Despite these signs, there is no correction - either in terms of fiscal discipline, access to cheaper sources of finance or in outlays for large and expensive social schemes

Advait Rao Palepu  |  Mumbai 


The (RBI) in its report on state finances finds these governments have overshot their expenditures, leading to deteriorating balances over the past three to four years.

Despite these signs, there is no correction — either in terms of fiscal discipline, access to cheaper sources of or in outlays for large and expensive social schemes.

The study finds the fiscal balance in the period between 2014-15 and 2017-18 deteriorated mainly because there was underestimation of the deficit. On the one hand, state governments’ overspent and overshot their deficit since 2012-13; on the other, there was deterioration in the quality of their expenditures.

The to (GFD-GDP) ratio for 2017-18 was 3.1 per cent, according to revised estimates. This means state governments have crossed the Fiscal Responsibility and Budget Management rule threshold for a third year.

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In 2016-17, this ratio was over 3.5 per cent, suggesting marginal improvement in the combined of all states since then.

The rise in has been attributed largely due to the impact of the (Ujwal Discom Assurance Yojana) scheme and because state governments have been receiving large loans from either capital markets or banks.

The deficit of states shrank by quite a bit in 2015-16 but worsened in 2016-17. Translating to slippage of 0.4 per cent (of GDP) in the consolidated revenue deficit.

State governments experienced a 27 basis points (bps) shortfall in revenue receipts, with aggregate decline in state government tax revenues of 0.33 per cent of in 2017-18, as against a year before.

RBI says “the decline in states’ tax revenues is essentially associated with the pending accounting issues related to Goods and Services Tax implementation. However, strict comparison with previous years is not possible due to lack of data.”

The apex bank expects the capital outlay for all states to grow slower this year (2018-19) at 14 per cent as compared to a growth rate of 20 per cent last year.

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Further, social sector expenditure spending is expected to increase this year — 12 states have made budget provisions for this rise.

Labilities of state governments have grown by double-digits over the years. The debt-ratio in 2017-18 was 24 per cent and is expected to rise to 24.3 per cent in 2018-19. The rise is being driven by the issuance of bonds, farm loan waivers and implementation of the central pay commission’s (CPC’s) recommendations, says RBI.

Further, state governments have increased their reliance on market borrowings as they try to meet their expenditures in an environment of a recurring shortfall in revenue receipts relative to budgeted targets.

RBI found the performance of a state does not influence the yield-spreads on State Development Loans, providing little incentive for states to improve their fiscal position.

The study finds the 12 states that implemented the CPC recommendations in 2017-18 registered a 28 per cent rise in revenue expenditure. Other states will implement the CPC awards by the end of this year or over the next two to three years.

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The report touches on the spate of farm loan waivers being announced in various states. The total debt waiver granted during 2017-18 amounted to 0.32 per cent of

“The impact on states’ exchequers varies widely across the waiver implementing states, between 4.6 per cent of in Tamil Nadu to 60.9 per cent of in Uttar Pradesh during 2017,” states the report.

A slippage of around 13 bps in the revenue expenditure account of states, for 2017-18 could be attributed to loan waivers, says RBI.

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“While waivers may cleanse banks’ balance sheets in the short term, it disincentivises banks from lending to agriculture in the long term. Consequently, loan waivers can have a dampening impact on rural credit institutions. More, they impact credit discipline, vitiate credit culture and dis-incentivise borrowers to repay loans, thus engendering moral hazard,” the report notes.

Fiscal pressures are emerging in several states because of the large expenditure outlays they have made. RBI says these schemes need to be made more productive by closing ‘efficiency gaps’, better targeting/reducing leakages and careful planning, as well as better forecasting.

First Published: Fri, July 13 2018. 02:21 IST