JOIN USFinances of the states are in a mess. Their deficits are on the rise and may eventually disturb the delicate applecart on the economic front. Also, states’ borrowing costs have gone up notwithstanding that interest rates have been on a slide. A clutch of welfare schemes like Ujjwal Discom Assurance Yojana (UDAY) and loan waivers may have worsened their ability to create fiscal space for capital investments and take up development projects in the last two years. On the other hand, states’ ability to mobilise resources, both through taxes and non-tax avenues, is on the wane. Increasing dependence on their share of central taxes including Goods and Services Tax (GST) may not augur well as several states scurry for cover to even meet their basic salaries bill. Given their delicate financial position, several states may turn unattractive for both domestic and foreign investments. Unless the weaknesses in state finances are corrected, industries and services providers may eventually feel the heat. These issues got flagged at a two-day brainstorming that the Fifteenth Finance Commission headed by N K Singh held with RBI Governor Shakti Kanta Das, top economists, bankers and heads of financial institutions at Mumbai recently.
The fiscal picture in 19 states (including Karnataka) that account for 90% of states budget seems very disappointing. As per available public data, fiscal deficit in states during the first nine months of 2018-19 crossed a whopping 62.5% as against 44.3% of their budget estimates computed for the same period last eight years. Barring states like Maharashtra, fiscal deficit of Madhya Pradesh, Rajastan and Kerala seem to have surpassed budget estimates in the first nine months itself. Bihar emerged as the worst performer with its deficit crossing 5.5 times the full-year estimate. While the gross fiscal deficit in states crossed a whopping 3.1% in 2017-18, slippages seem to have continued in 2018-19 as well.
Neither the finance commission nor RBI has readymade solutions to trim the deficits and put state finances back on track. Given the ambitious electoral promises made by the BJP, Congress and a host of regional parties, the possibility of trend reversal seems bleak even in 2019-20. One way may be to make it mandatory for states to invest in sinking and guarantee redemption funds. These funds maintained by RBI will cushion states in meeting future repayment obligations. Another option could be to ask surplus states like Maharashtra to debt-finance other states running large deficits. Setting a minimum borrowing threshold for states apart from nudging them to mobilise cheaper funds from the market could be considered. Apart from utilising the special drawing facility with RBI, states may also consider bond issues for the best of their city corporations and municipalities. Course correction will have to begin now.