Fiscal discipline
It is not enough to focus on just the central government’s fiscal deficit. The states count, too. RBI governor Urjit Patel has rightly cautioned that high borrowings by the Centre and states block India’s ability to improve its credit rating. Successive finance commissions have recommended greater discipline: lowering the debt to GDP ratio for the Centre and states combined, zero-revenue deficit and emergence of revenue surplus.
The combined debt to GDP ratio of about 66% in 2014-15. Official data comes with a huge lag. Last year, rating agency Moody’s forecast combined fiscal deficit of the Centre and states at 7.2% in 2015-16. This is well above the combined yearly limit of 6% recommended by the 14th Finance Commission for the period 2015-16 to 2019-20. Aspecial report by Ind-Ra on the budget performance of 23 states has estimated that budgetary targets are likely to be missed in FY17. Only 12 states had a revenue surplus in FY16 and qualify for additional borrowings.
At an aggregate level, states are likely to have had a revenue deficit for a third consecutive year in FY16. This is disconcerting. States have their own resources: the value-added tax on petroleum, a money spinner, accounting for nearly 18% of their revenues. States’ share of tax devolution too rose to 42% from 32% of the divisible pool, based on the 14th FC recommendation. However, central transfers (share in central taxes plus grants-in aid) declined by 0.3% of GDP in 2015-16, as many centrally schemes were withdrawn. The states and the Centre must adopt the Goods and Services Tax at the earliest to boost revenues.
Once adopted, GST will put paid to luring investment via tax concessions. Better governance and infrastructure would become the differentiating factors. In order to raise resources on their own, the states need to improve their credit rating. And greater fiscal discipline is the key to better ratings. For their own sake and for the sake of the nation’s overall macroeconomic health, the states must put their fiscal house in order.
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