Fiscal Consolidation: GST is the best bet for state govts, says RBI

Fiscal Consolidation: GST is the best bet for state govts, says RBI

GST implementation is likely to boost the SME sector by improving their ease of doing business.

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The Reserve Bank of India (File Photo)

The Reserve Bank of India (RBI) has said introduction of GST would have economy-wide ramifications in terms of growth, inflation, government finances and external competitiveness over the medium-term.

“It is likely to champion a new course for cooperative federalism in India, focusing on collaboration between the Centre and states. GST remains the best bet for state governments in returning to the path of fiscal consolidation without compression of productive expenditure,” it said in the report titled State Finances: A Study of Budgets of 2016-17.

“GST implementation challenges should be addressed through a robust dispute resolution mechanism; with the goods and services tax network (GSTN) expected to provide the necessary information technology (IT) infrastructure to all stakeholders,” the RBI study said. Greater devolution of resources through statutory transfers would provide states with the flexibility to prioritise their expenditure in sync with their development objectives. From a medium term perspective, debt sustainability of states is likely to be the key factor in shaping the evolving contours of state finances, it said.

According to the RBI, the macroeconomic impact of introduction of the GST could turn out to be significant in the years ahead, given the dominance of the services sector in India. “Besides giving a major boost to tax revenue, the larger impact on the fiscal health would be from reduction in the administrative compliance cost. GST is likely to be supportive of fiscal consolidation without compromising capital expenditure,” it said.


Under the prevailing tax structure in India, investment is discouraged through the application of excise duties and VAT on capital goods, for which no set off or input tax credit is provided.

Moreover, GST implementation is likely to boost the SME sector by improving their ease of doing business, lowering logistical costs, extending outreach beyond state borders and aiding SMEs dealing in sales and services. Furthermore, economic activity would also benefit from exports becoming more competitive as the GST regime will eliminate the cascading impact of taxes, it said.

“The implementation of the GST should also boost domestic business confidence, including among foreign investors by assuring a stable and transparent tax system, free of cascades and distortions.

RBI warns against loan waivers again

The RBI has warned state governments against loan waivers as such initiatives could add to their fiscal burden and affect their finances over the medium term. “While these loan waivers could alleviate the immediate debt burden of financially distressed farmers, it is essentially a transfer from tax payers to borrowers with an adverse bearing on the fiscal viability of states,” the RBI said in a study.

Moreover, it impacts credit discipline, vitiates credit culture and disincentivises borrowers from repayment, thus engendering moral hazard with expectations of future bailouts, the RBI cautioned.