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GST will not reduce state deficits as social expenditure rises: S&P Report

According to S&P Global Ratings the institutional framework for Indian states is evolving, but there is structural deficits due to persistent revenue expenditure mismatch

Press Trust of India  |  Singapore 

GST
Another significant development in recent years has been the adoption of an amended FRBM Act, the report noted

(GST) regime in India is not likely to reduce the deficits of state governments significantly, amid large and growing expenditure mandates for the social sector as well as capital spending, says a report.

According to the institutional framework for Indian states is evolving, but there is structural deficits due to persistent revenue expenditure mismatch.

credit analyst YeeFarn Phua in the report titled "Public Finance System Overview: Indian States" noted that the passage of the bill in 2017 is a major overhaul of tax structure and will help to widen the tax base and improve revenues of state governments.

"However, states will continue to run large deficits because a significant part of this imbalance is from the expenditure side. States are unable to cut expenditures because of large and growing expenditure mandates for the social sector as well as Therefore, the revenue-expenditure gap will remain large," said Phua.

Further, policy implementation remains sub-par in India, the report noted.

Another significant development in recent years has been the adoption of an amended Fiscal Responsibility Management (FRBM) Act, which forms the fiscal framework, in March 2018, the report noted.

Under the amended FRBM Act, the government will target a debt-to-GDP ratio of 60 per cent with the split being 40:20 for central government and states.

Further, the government will use as the key operational target, the report said but added that the FRBM committee lacks the authority to mandate its core recommendations.

First Published: Tue, May 07 2019. 11:45 IST
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