Current Public Administration Magazine (June - 2017) - States of distress

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Centre State Relations

States of distress

                                        - The Indian Express Editorial

The combined fiscal position of states has deteriorated sharply over the last couple of years, with the gross fiscal deficit-GDP ratio breaching the 3 per cent threshold in 2015-16 — the first time this has happened in over a decade. While this marks a reversal of the trend till two years back, when states were more fiscally prudent than the central government, it is worrying that the run-rate is likely to continue and possibly worsen — triggered by a combination of revenue and expenditure side issues.

The spate of farm loan waivers and the expected rise in the interest liabilities of states that have participated in financial restructuring of electricity distribution utilities (through the UDAY scheme), are two looming stress points. On the receipts side, while grants from the Centre have gone up — reflecting the changes in the pattern of funding of centrally sponsored schemes — there is likely to be fresh strain on the receipts side as nearly a dozen states are projected to see a sharp dip in state excise revenues from alcohol due to the closure of bars along highways and efforts at prohibition.
States’ revenues from stamp duties, which are about 12 per cent of overall state revenues, have also seen a slowdown in the backdrop of the continuing impact of demonetisation on property sales. The RBI has strongly highlighted these risks, and two additional stress points — the guarantee commitments of state governments with respect of state public sector enterprises and the potential increase in states’ committed liabilities in case they decide to implement the recommendations of their own Pay Commissions in FY’18.

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As a result, even as the Centre’s fiscal deficit has progressively come down to 3.5 per cent in FY’17 from 4.9 per cent in FY’13, the combined fiscal deficit (of Centre and states) could touch 7 per cent this fiscal due to bloating state deficits. The Centre has to face its share of the blame, especially on the farm loan waivers that got traction in the run-up to the UP elections, setting off cascading demands across other states. The UP government’s announcement of a Rs 36,000-crore farm loan waiver scheme came despite the fact that it figures in a list of states that are not eligible for additional market borrowing as they are not compliant with fiscal prudence norms prescribed by the fourteenth finance commission.

Maharashtra, which had announced a Rs 34,000-crore crop loan waiver for farmers last month, is staring at the prospect of the state’s public debt topping the Rs 4 lakh-crore mark by March 2018. So, even as the Union government has budgeted for a sharply lower fiscal deficit at 3.2 per cent this financial year, the continued fiscal profligacy of states would be counterproductive to the Centre’s consolidation exercise in the longer run.

(The Indian Express Editorial)

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