Falling deficit: faster growth to give States greater fiscal room for maneuver

By Rohit Vaid

New Delhi, February 26 (IANS): Economic growth along with higher tax revenues should give state governments more room to maneuver in FY23.

Furthermore, it is estimated that despite Covid-19 and populist regimes, the outlook for Indian state finances is expected to improve in FY23.

Notably, increased financial assistance provided by the Center should make up for any shortfall during the ongoing pandemic phase.

In the FY23 budget, the Center allocated financial assistance of Rs 1 trillion in the form of interest free loans over 50 years.

In addition, the Center has allocated a higher amount of Rs 7.45 trillion as the states share central taxes in FY22RE.

However, the situation remains critical with the wave of Omicron which slows down the dynamics of growth.

According to a study of budgets by the Reserve Bank of India, the total liabilities of all state governments increased by 14.6% to Rs 60.2 trillion in the Revised Estimates (RE) for FY 2021, compared to 52.5 trillion rupees for the financial year 2020.

“Subsequently, liabilities increased by 13% to Rs 68 trillion in the fiscal year 2022 (BE) budget forecast,” said Aditi Nayar, Chief Economist, ICRA.

“As a proportion of GSDP, total liabilities deteriorated from 25.8% in fiscal year 2020 to nearly 30% each in fiscal year 2021 RE and fiscal year 2022 BE. “

Regarding the high debt levels due to Covid-19 and populist agendas, Mr. Govinda Rao, Chief Economic Advisor, Brickwork Ratings, said that the level of debt in India is high compared to the level of development of the country. .

“However, on the whole, states have adhered to the FRBM borrowing target of 3% of GDP. So populism has not had much of an impact to the extent that even when some announcements are made, they are diluted when implemented,” Rao said.

“Overall, state indebtedness is around 20% of GDP and that is the target set by the 15th Finance Committee for 2025-26.”

Furthermore, he said the center’s debt needs to be cut sharply from the current 63% of GDP to around 40%, which is a tall order.

According to India Ratings and Research, due to Covid-induced pressure on income and expenditure, the budget deficit was higher and hence increased the debt burden in FY21.

“Things are improving in FY22,” said Anuradha Basumatari, associate director, India Ratings and Research.

“Populist regimes exist and are not necessarily a key reason for the increased debt burden. The increase in debt in FY21 is largely due to the impact of Covid on growth and revenue, while also forcing states to incur expenditures for COVID containment and control.”

In addition, the agency expects the overall state budget deficit for FY23 to be 3.6% of gross domestic product (GDP) compared to 3.5% (revised) for FY23. 22 (forecast).

He previously gave a forecast for FY22 at 4.1%.

The revision was made due to better-than-expected tax revenue growth and higher nominal GDP growth in FY22.

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