Aditi Nayar is principal economist, ICRA Limited.
Aditi Nayar writes: By increasing tax devolution, Centre can help states tide over another uncertain year and make spending comfortable for them
Fiscal concerns will be fanned by spike in infections and the associated healthcare costs
The question is whether this will force the states to move on both the power sector reforms, which have proven challenging in the past, and the municipal reforms, so that their resource availability may be enhanced.
However, amidst all these concerns, yields on government security appear remarkably sanguine, as if they are patiently waiting for the central bank to absorb the extra sovereign borrowings in the primary or secondary market.
Lower tax devolution, delays in GST compensation are potential risks
To avoid a substantial fiscal slippage at the state government level, a sizeable expenditure reduction or deferral is likely to be required, given that the borrowing limit set by the central government acts as a soft constraint to the size of the states’ fiscal deficits.