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States resume fiscal consolidation, set to control deficits, paper says

States have also taken into account fiscal implications of the end of GST compensation regime in the budget estimates of 2022-23, according to the NIPFP paper.

August 04, 2022 / 01:12 PM IST

Indian states have resumed following the path of fiscal consolidation post the pandemic and success in achieving revenue and spending targets for the current financial year could help them control deficits and debts, according to a working paper by National Institute of Public Finance and Policy.

“After two consecutive years of fiscal stress, states have again resumed following the path of fiscal consolidation by augmenting revenue mobilization and containing expenditures,” Sacchidananda Mukherjee, Associate Professor at the New Delhi-based institute, said.

Given the growth prospects of gross state domestic product in the current financial year, overall revenue side of state budgets seems realistic as they have set cautious targets in revenue mobilization, he added.

States’ finances had come under significant stress over the last few years as the pandemic stalled economic activities, hurting revenue collections. The consolidated fiscal deficit of 18 major states rose to 3.89 percent of aggregate GSDP in 2020-21 from 2.56 percent in 2019-20 but the deficit is expected to fall to 3.29 percent this financial year after slipping to 3.39 percent last fiscal.

Meanwhile, consolidated public debt of these states is pegged to rise to 23.93 percent this fiscal from 23.66 percent last year, 20.53 percent in 2019-20 and 19.66 percent in 2018-19.

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With rising economic growth, revenue mobilization has improved, helping states boost spending in the last financial year.

States budgets were also cushioned over the last two fiscals they continued to receive GST compensation which helped them contain fiscal deficits. States also received back-to-back loans in lieu of shortfall in GST compensation fund from the Centre during 2020-21 and 2021-22 which helped them to contain public debt.

A dozen states have sought an extension of GST compensation beyond the deadline of June 30 this year as they stare at a potential shortfall in revenues. The Centre has acknowledged their suggestion but has not been in favour of such a dispensation. The GST compensation cess has been extended to March 2026 to repay the special borrowings over the last two fiscal years that were used to plug the shortfall in the GST cess collections.

Interestingly, states have taken into account fiscal implications of the end of GST compensation regime in the budget estimates of the current financial year, according to the NIPFP paper.

“The impact of end of GST compensation regime on state finances will vary across states and it will be depending on state-specific dependence on GST compensation to finance budgeted expenditures,” it added.
Mrigank Dhaniwala is Associate Editor - Economy at Moneycontrol and leads the economy and policy coverage. Mrigank has 15 years of exprience as a reporter, copy and news editor across print, online and wire media. He has also reported on Southeast Asian economies, monetary and fiscal policies.
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