States can avoid potential revenue shortfall by implementing power sector, local body reforms: SBI Ecowrap

Union Finance Minister Nirmala Sitharaman

State Bank of India’s economic research department in its report on July 9 said the state governments could avoid a potential revenue shortfall in 2021-22, if they implement reforms in the power sector and local bodies as recommended by the 15th Finance Commission for 2021-26.

SBI Ecowrap said states' revenues could see a shortfall of Rs 1.05 lakh crore in the current financial year as compared to the estimates in the government's budget for 2021-22 due to lower GST collection and oil excise.

According to calculations done by SBI Ecowrap, at the current rate of consumption, GST collections are estimated to come in at Rs 7.59 lakh crore for 2021-22 as against the government's allocation of Rs 7.98 lakh crore in the Budget of 2021-22. This means a shortfall of Rs 40,000 crore.

Similarly, based on the current rate and consumption trends of oil and petroleum products, states could see a shortfall of Rs 53,000 crore to Rs 65,000 crore in 2021-22 from oil excise.

However, not only can states avoid a revenue shortfall, but if they carry out the reforms in the power sector and local bodies as recommended by the 15th Finance Commission, states could add a potential Rs 1.77 lakh crore to their revenues.

"This implies that Indian states could still end 2021-22 with an additional Rs 72,000 crore in their kitty (as compared to the estimates in the government's budget for 2021-22)," SBI Ecowrap said in its report.

In May 2020, the central government had allowed states to borrow an additional 0.5 percent of the GSDP from the RBI on fulfillment of power sector reforms. However, only 13 states had implemented the reforms in the last financial year.

This year, the central government once again has extended the same offer, thus states can borrow an additional Rs 1.1 lakh crore from the RBI.

Furthermore, the government has also accepted the 15th Finance Commission proposal to increase the share of grants in total transfers to states to 19.65 percent from 11.97 percent if certain pre-conditions are met by the local bodies in states.

If the conditions to be implemented in local bodies are met, states could borrow an additional Rs 67,105 crore.

In its report, the 15th Finance Commission has asked state governments to ensure that local bodies provide provisional and audited accounts online in the public domain.

Similarly, the commission has asked states to agree to take over the future losses of state power distribution companies in a graded manner. States were also asked to install 250 million smart meters, 10,000 feeders, and 400,000 km of low-tension power transmission lines.