Updated: May 31, 2021 8:57:26 am
The second wave of the Covid-19 pandemic has led to considerable uncertainty over growth and the fiscal outlook for the current financial year. As states have opted for localised restrictions in a staggered manner, the timelines with which fresh cases record a dip across the country will tend to vary. But what will critically affect the regional trends in economic activity and fiscal outcomes over the course of this year is the pace at which various states are able to secure and roll out the Covid-19 vaccinations for the under-45 age group.
Looking back, the disruption to economic activity unleashed by the first wave significantly worsened the fiscal health of state governments. We have analysed the fiscal data for all states with the exception of Goa, Manipur, Meghalaya and Sikkim. The aggregate revenue deficit of our sample of 24 state governments soared to Rs 4 trillion as per the revised estimates (RE) for 2020-21, up from a modest budgeted amount of Rs 353 billion. And, despite a 16 per cent cut in capital spending, the fiscal deficit of these states deteriorated to Rs 8.7 trillion in 2020-21 (RE), up from the budgeted estimate of Rs 6.0 trillion.
The budgets for the ongoing fiscal year, which were published by mid-March by most of the state governments in our sample, had projected a welcome, but an ambitious, decline in the aggregate revenue deficit to Rs 1.2 trillion, lower than the pre-Covid-19 level of Rs 1.3 trillion in 2019-20. This has benefitted from the considerable expansion in their revenue receipts this year, forecasted at 24.7 per cent, compared to a moderate 12.4 per cent increase in their aggregate revenue expenditure.
This anticipated shrinking of the revenue deficit has allowed states to plan for a substantial expansion in their capital expenditure and net lending (pegged at 34.1 per cent), while still attempting a modest correction in their budgeted fiscal deficit, bringing it down to Rs 7.6 trillion in 2021-22 from Rs 8.7 trillion in 2020-21 (RE).
However, the second wave of Covid-19 infections and its spread to rural areas has fanned fiscal concerns, even though no nationwide lockdown has been announced so far. We believe that the spike in infections and the associated healthcare costs will weigh upon sentiment and household disposable income. The curtailed consumption of discretionary items and contact-intensive services will dampen the growth of states’ own tax revenues this year. Moreover, lower mobility during the regional lockdowns will constrain tax revenues that states earn on fuels.
The GST collections reported in a month reflect the tax on goods and services consumed in the previous month. The data for the generation of GST e-way bills confirms that the staggered imposition of the localised lockdowns has had an adverse impact on economic activity since April. This will result in a sequential slowdown in GST collections that will be reported in the subsequent two months. Nevertheless, we expect the state GST collections to nearly double to Rs 1.7 trillion in the first quarter of this year, up from Rs 0.9 trillion over the same period last year, boosted by the record-high collections in April that reflected healthy economic activity in March.
While the risk of another wave cannot be discounted, a revival in the sentiment and consumption is linked to the timelines with which the availability of vaccines improves in different states. However, we do expect states’ own tax collections to trail their budget estimates as they were drawn up before the second wave. For this year, we expect state GST collections at Rs 6.1 trillion, falling below their projected revenues of Rs 8.7 trillion. This indicates a GST compensation requirement of Rs 2.65 trillion — only 38 per cent of which may be met through the expected GST compensation cess collections. Following the meeting of the GST Council, the Finance Minister has indicated that a back-to-back loan of Rs 1.58 trillion will be provided to the states, in line with our estimate of the gap between the GST compensation requirement and cess collections of Rs. 1.65 trillion in FY2022. If the tranches of this loan start flowing to the states soon, it will alleviate their anticipated revenue crunch over the next two months. Already, there has been a sharp rise in the size of the upcoming State Development Loan auction to Rs. 19,550 crore, relative to the modest average size of around Rs. 7,400 crore seen so far in the first eight auctions held in FY2022.
On the spending side, our baseline estimate for the cost of vaccinating those in the ages of 18-44 works out to Rs 594 billion for the country as a whole. States could finance a portion of this from the unexpected additional devolution of taxes, amounting to Rs 450 billion, that they received from the Centre at the end of the last financial year. Nevertheless, state governments may also have to recalibrate their planned revenue spending to accommodate such expenditure, as well as any shortfall in their revenues from the budgeted level. Else, a cutback in capital spending or a sharp rise in their fiscal deficit may be unavoidable.
In any case, the capital spending budgeted by certain state governments this year appears to be optimistic in our view. Moreover, localised restrictions imposed during the last two months are expected to have constrained activity. While these restrictions will ease in the coming weeks in a staggered manner, the seasonal lull in activity that is usually seen during the monsoon season (June-September), may further delay a meaningful pick-up in capital spending. Regardless, fiscal outcomes will vary appreciably across states this year, depending on the impact of infections-restrictions-vaccinations on economic activity.
This column first appeared in the print edition on May 31, 2021, under the title ‘Facing the shortfall’. The writer is chief economist, ICRA