Opinion Express View on RBI study on state budgets: State of finances

The Covid-19 pandemic adversely impacted the fiscal position of both central and state governments. The latter saw their combined fiscal deficit rise to 4.1 per cent of GDP in 2020-21, their debt-to-GDP ratio also went up, as their revenues came under stress, while the pressure to spend rose during this period. However, their fiscal position has since then witnessed considerable improvement, as outlined in a study by the Reserve Bank of India on state budgets. Alongside, states have, aided by the Centre, also tried to maintain a healthy momentum in their capital spending to provide the much-needed fillip to investment activity in the economy.

As per the study, the consolidated fiscal deficit of states fell from 4.1 per cent of GDP in 2020-21 to 2.8 per cent in 2022-23. The deficit in 2022-23 was, in fact, lower than what states had pegged in their budgets as well as the revised estimates. For 2023-24, states have projected their deficits at 3.1 per cent. This, however, is lower than the limit of 3.5 per cent for the year, implying that states are not utilising the entire fiscal space available to them. For the current financial year, states had projected a healthy rise in their revenue receipts. However, data available for the first half of the year shows that their revenue growth has been slightly lower than what they had budgeted for. However, the study notes that while states’ revenue expenditure has decelerated (committed expenditure which includes interest payments, pensions etc have been pegged at the same level as last year), capital spending continues to grow at a robust pace. Their capital outlay has risen by a staggering 52.6 per cent, aided by the Centre’s assistance for investments. In the Union budget, the central government had provided for a 50-year interest-free loan to states for investments with an outlay of Rs 1.3 lakh crore.

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The study, however, lists several challenges for state finances. For one, the decision of some to shift back to the old pension scheme will impose a fiscal burden. This will have implications for the space available to them to allocate more for capital spending. While overall, the fiscal position of states has improved, not all of them have seen such healthy improvements. In fact, some states continue to have significantly higher debt and deficit levels. In such states, as well as others, the inclination of political parties to announce fiscally imprudent schemes, especially in the run-up to elections, can only worsen matters. These need to be guarded against.