OCTOBER 10, 2019

By TIOL Edit Team

RESERVE Bank of India (RBI) has done a wise job in time: It has turned torchlight on yet another crucial factor that has and is contributing to the economic slowdown. The debilitating factor is the reduction in capital expenditure (capex) by States since 2017.

According to RBI's 'State Finances - A Study of Budgets of 2019-20', States' capital spending has declined by about 0.3 to 0.5 per cent of GDP during 2017-19. The study has attributed the decline to fiscal consolidation and pressures to increase current spending. It has not disclosed whether electoral compulsions led the States to shift expenditure focus to populist measures.

As put by the Study, "Arresting this trend is crucial to avoid adverse effects on long-term growth and welfare. Going forward, it is important for states to pursue their capital expenditure plans as budgeted in 2019-20 by front-loading them. This is particularly important as it has strong multiplier and welfare enhancing effects ".

We believe restoration of momentum in States' capex expenditure can act as pull-factor for private investment. When States invite tenders for building more roads, bridges, hospitals, etc, the private sector contractors also chip in some investments to execute contracts. This would also end sluggishness in growth of credit.

Enhanced capital expenditure both by the States and the Centre is the key to revival of private investment in the near-term, as compared to long-term investment that can be stimulated by 15% corporate tax for new domestic manufacturing companies.

The Study has rightly suggested that the States will have to simultaneously make efforts towards improving their revenue-raising capacity to support their expenditure.

We hope the Study rings in alarm bells in the Union Finance Ministry and NITI Aayog. We urge Prime Minister's Office to convene a meeting of the Governing Council of NITI Aayog or Inter-State Council to discuss collective efforts required to reverse slowdown.

As pithily put by the Study, "The current slowdown in the economy is likely to have implications for tax devolution to states. The corporate tax and GST rate cuts, while are important to boost investment, may result in revenue loss for states in 2019-20, if not compensated by states' own efforts towards revenue mobilisation ".

It goes without saying that the fifteenth Finance Commission (FFC) would factor in the data and analysis generated by the Study. FFC, in fact, is in enviable position to shed light on slowdown as it had sponsored its own studies on entire gamut of budgeting and financial health.

The only limitation here is that FFC can't make public its insight on slowdown. The Centre should, however, seek its inputs without waiting for submission of its report.

RBI's annual study analyses the underlying dynamics of States budget estimates (BE) for 2019-20 against the backdrop of actual and revised (and provisional accounts) outcomes for 2017-18 and 2018-19.

The capital expenditure cuts helped States to keep their gross fiscal deficit (GFD) within threshold of 3 per cent of gross domestic product (GDP) under Fiscal Responsibility and Budget Management (FRBM) rules during 2017-18 and 2018-19.For 2019-20, states have budgeted for a consolidated GFD of 2.6 per cent of GDP with a marginal revenue surplus as compared to revenue deficits in the previous three years.

Another worrisome issue raised by the Study is rising debt of the States. It notes that outstanding debt of States have risen over the last five years to 25 per cent of GDP, posing medium-term challenges to its sustainability. As put by the Study, " Incipient risks to debt sustainability emanate from losses of DISCOMs as well as potential invocation of guarantees ".

There can hardly be any difference of opinion over the Study's observation that revenue generation holds the key to prudent debt management. The States should improve their direct and indirect tax collections. They should eschew soft options such as hiking tax rates or introducing new imposts such as cess or surcharge on taxes to finance cows' welfare.

We all know there is ample scope to raise non-tax revenue in each State. The Study has suggested that States should raise user charges on some economic services like power and irrigation.

Unfortunately, both these domains are governed by populist vision of States' political leadership. We hope PM and CMs would discuss this issue while mooting collective efforts to expedite growth rate. We wish more & regular Centre-States interaction on economic challenges.