Statsguru: Six charts explain how states are improving their fiscal health

Given the central government is targeting a fiscal deficit of 6.8 per cent of gross domestic product (GDP) this year, it comes as no surprise that the fiscal condition in states is also under stress. However, data from the recently released state finances report by the Reserve Bank of India (RBI) does indicate that states are moving faster to improve their fiscal health.

Although the fiscal deficit will remain above the 3 per cent mark in 2021-22, states are expecting a 1 per cent decline in fiscal deficit (as a per cent of their gross state domestic product) from 4.7 per cent in 2020-21 to 3.7 per cent in 2021-22. Of the 20 large states analysed by Business Standard, eight are still expected to have a higher than 4 per cent fiscal deficit in 2021-22 as per their budget estimates (chart 1). 

Even if the states reduce the fiscal deficit, the debt to GDP ratio is expected to remain alarmingly high. It was rising even before the pandemic, but crossed the 30 per cent threshold last year. The Fifteenth Finance Commission expects it to hit 33.3 per cent in 2022-23, before declining to 32.5 per cent in 2025-26 (chart 2).

Not just states, even local bodies are reporting stress due to the pandemic. A survey of 221 municipal corporations conducted by the RBI showed that 70.4 per cent witnessed a decline in revenues, whereas expenditures increased for 71.2 per cent of corporations. Nearly a third reported repurposing of expenditure towards Covid response, and only 2.4 per cent reported no fiscal problems (chart 3). Analysis of data of 20 municipal corporations showed that revenue surplus dipped by 38 per cent during the pandemic (chart 4).

Further analysis by Business Standard showed that nearly half of all municipal corporations were facing financial stress in 2017-18. A third were in the severe stress category across three counts — fiscal balance, fiscal stress and committed expenditures. The study uses a municipal corporation’s own revenue as a ratio of total revenue receipts to define fiscal stress (chart 5). A significant reason for cities not improving their finances has been the failure to increase their own tax revenue. Property tax coverage remains limited; data from OECD shows that India is one of the worst performers in terms of property tax to GDP ratio (chart 6).

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StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines