A macro-view of Fiscal health of states

A macro-view of Fiscal health of states

News: Here we will discuss about the fiscal operations of the Indian states and understand the importance of improving state finances to improve country’s fiscal situation.

Background:
• Indian states mobilize over a third of total revenue, spend 60% of combined government expenditure, and have around 40% share in government borrowing.
• The basis of this analysis relies on the data collected from the budgets (2023-24) of 17 major States in India.

Key Findings:
• The general government deficit and debt, which increased during the COVID-19 pandemic, has started to recede.
• There have been significant post-pandemic fiscal corrections at the Union and State levels.
• The Union level fiscal deficit declined from 9.1% of GDP in 2020-21 to 5.9% in 2023-24 (BE).
• All-State fiscal deficit was 4.1% of GDP in 2020-21, and it is expected to be 2.9% of GDP for the major States in 2023-24 (BE).

Which factors contributed to betterment in Fiscal situation?
The 17 major States contained their fiscal deficits despite revenue contraction during the peak of the COVID-19 pandemic.
• Better Union-State fiscal co-ordination has helped.
• States were successful to reprioritize expenditure and quickly contain the fiscal deficit.
• Improved GST collection and higher tax devolution.
• Non-GST revenues are also showing signs of recovery after the pandemic in most States.

What challenges need to be addressed?
• The reduction in the fiscal deficit has not been accompanied by a corresponding reduction in revenue deficit. Out of 17 major states, 13 states have a deficit in the revenue account in 2023-24 (BE). They also have large state to GSDP ratio.
• The all-State share of revenue deficit in fiscal deficit for the same year is expected to be 27%.
• The 12th Finance Commission identified three States (Kerala, Punjab, West Bengal) as fiscally stressed States, in term of revenue deficit. The number has now increased to seven.

Way Forward
The focus should be brought back to the management of the revenue deficit. Following steps may help.
• Linking interest-free loans to States with a reduction in revenue deficit can prevent diversion of borrowed resources and incentivize fiscal discipline.
• Implementing performance incentive grants based on revenue deficit reduction can further encourage fiscal balance and quality expenditure.