Explained: Why state budgets matter

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News:The Reserve Bank of India (RBI) has released its annual study of state-level budgets.

Facts:

Highlights of the study:

  • The study has found that except during 2016-17,state governments have regularly met their fiscal deficit target of 3% of GDP. 
  • However,most states ended up meeting the fiscal deficit target not by increasing their revenues but by reducing their expenditure and increasingly borrowing from the market.
  • This had affected the loans that state governments provided to power projects, food storage and warehousing.It has also impacted the states capital budget allocation for key social and infrastructure sectors.
  • Hence,reduction in overall size of state budgets has likely worsened the economic slowdown that was slowly setting in since the start of 2016-17, when India had grown by 8.2%.
  • The outstanding debt-to-GDP of States have also risen over the last five years to 25% of GDP making sustainability of debt the main fiscal challenge.

Challenges for the states:

  • The States have been finding it difficult to raise revenues. 
  • States revenue prospects are confronted with low tax buoyancies, shrinking revenue autonomy under the Goods and Services tax(GST) framework and unpredictability associated with transfers of IGST and grants.

Why understanding about state government finances important?

  • States now have a greater role to play in determining India‚Äôs GDP than the Centre. 
  • States now spend one-and-a-half times more than the Union government.
  • They are the bigger employment generators. They employ five times more people than the Centre.
  • Further,since 2014-15, the states have increasingly borrowed money from the market.
  • Hence,the overall trend has serious implications on the interest rates charged in the economy, the availability of funds for businesses to invest in new factories and the ability of the private sector to employ new labour.

Additional information:

About Fiscal deficit:

  • The difference between total revenue and total expenditure of the government is termed as fiscal deficit. 
  • It is an indication of the total borrowings needed by the government. While calculating the total revenue,borrowings are not included.