Participation in the central government’s Ujjwal Discom Awas Yojana (UDAY) scheme may have deteriorated the finances of state governments but the Goods and Services Tax (GST) could help them to consolidate fiscally, according to a report by the Reserve Bank of India (RBI).
“Notwithstanding the deterioration of the debt position of state governments in the preceding two years due to their participation in the financial and operational restructuring of state power distribution companies through UDAY, empirical evaluation reveals that the current fiscal policies of states are sustainable in the long-run,” the RBI said in its report titled ‘State Finances: A Study of Budgets of 2016-17’.
Due to prevailing uncertainty about the revenue outcome from the GST implementation, the outlook for revenue receipts of states could turn uncertain. There is, however, the cushion of compensation by the Centre for any loss of revenue for the initial five years. In this context, GST remains the best bet for states in clawing back to the path of fiscal consolidation over the medium-term, the central bank added.