What is the issue?
- The combined fiscal position of states has deteriorated sharply over the last couple of years.
- The gross fiscal deficit-GDP ratio breached the 3% threshold in 2015-16.
- This marks a reversal of the trend till two years back, when states were more fiscally prudent than the central government.
- According to the 14th Finance Commission, all the states are required to keep fiscal deficit under 3% of the Gross State Domestic Product (GSDP) from 2015-16 to 2019-20.
What are the causes?
- The series of farm loan waivers has significantly strained the states' financial conditions.
- Rise in the interest liabilities of states that have participated in financial restructuring of electricity distribution utilities (through the UDAY scheme).
- States’ revenues from stamp duties have also seen a slowdown in the backdrop of the continuing impact of demonetisation on property sales.
- Many 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.
How does the future look?
- 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.
- the potential increase in states’ committed liabilities in case they decide to implement the recommendations of their own Pay Commissions in FY’18.
- The deteriorating nature of states' fiscal would be counterproductive to the Centre’s consolidation exercise in the longer run.
Source: The Indian Express
