Dr D M Deshpande
Generally speaking, lesser attention is paid to the fiscal performance of states. Actually, states collectively spend more than the Central Government. States’ expenditure over and above their revenues, add up to the consolidated deficit with the centre. Sometimes, despite centre’s fiscal prudence, the overall fiscal deficit goes out of control essentially because the States have not exercised adequate restraint in spending.
In this context, the RBI’s annual study of fiscal performance of states becomes important. In it’s latest edition, it has shown that collectively states have missed the fiscal deficit target of 3% of the GDP; this is the third consecutive year that states have over shot their target. It touched 3.1% for the last fiscal, because of ‘overshooting of revenue expenditure and shortfall of revenue receipts’. This will have direct and adverse impact on the level of inflation in the economy. Additionally, borrowing more, whether by states or by the centre, is bad and undesirable, for, it puts strain on the available financial resources in the economy. Large and bulk borrowings, especially within a short span, will keep interest rates elevated. Worse, it crowds out private investment from the domestic markets. That is why, apart from the lower interest rates in advanced countries, several big companies prefer to borrow from abroad, notwithstanding the currency risk involved.
Part of the problem with revenue shortfall in 2017-18 was due to introduction of GST. Now that it has stabilised, states could look forward to a lower deficit provided they show a modicum of discipline in spending. The greater culprit was the loan waivers which were announced by a slew of states. The RBI report estimates that in 2017-18 total debt waived was to the tune of 0.32% of GDP! The tendency to announce loan waivers is not likely to stop; instead, with some states going to the polls and the general elections not far away, this competitive populism will only see a rise. The RBI report estimates that the financial burden on account of loan wavers in the current fiscal will be to the tune of 0.2% of the GDP. Therefore, the 2.6% projected consolidated deficit of states is certain to come a cropper. Problem with loan wavers is that while it might give temporary relief to select families, state will not benefit. It will not improve investment, for, banks and financial institutions will be reluctant to lend to individuals and groups whose loans have been waived off by government.
It is not just the quantity of deficit, even more worrying is the quality of fiscal slippage. It is seen that the increase in revenue expenditure is mainly responsible for higher deficit. Which means that the higher expenditure is not directed towards creating additional capacities in production and distribution or in improving the infrastructure in the state. This is only bound to fuel inflation further and dent the efforts of Centre and RBI in fighting the menace of price rise.
It is also observed that more and more states are resorting to issue of bonds to fund the expenditure. Such increased borrowing activity is not good for the states nor for the nation’s economy. Maturity profile of bonds issued by states show that the redemption pressure has started from last fiscal itself. Financially weaker states will have to offer higher coupon rate. Beyond a limit, the risk of default, too, rises. Sovereign default, even if it is at the level of a state, does not augur well for the future of the entire country.
However, it must be pointed out in favour of states that they feel shortchanged by the centre. The 14th Finance Commission has increased states’ share in central pool of taxes from 32% to 42% and the Central Government has accepted it and taken all credit to itself. But by a sleight of hand, it has raised the cesses from 9.3% of the gross revenues in 2014-15 to 14.2% in 2018-19. States too have obligations as they have increased spending on health, education and now sanitation. They should not be denied their due share.
Finally, prudent fiscal management is a necessity at both levels of states and the centre. It is easy to run up a huge deficit but it takes painstaking measures over an extended time period to bring it down. Whether it is a question of creating jobs or improving investment or controlling inflation, there’s no escape from austerity in fiscal space.