25/06/2022 - Economy

KEY POINTS

·        The Covid-19 pandemic-related disruption has had a material impact on government finances all over the world.

·        Before the onset of the pandemic, the average gross fiscal deficit (GFD) to gross domestic product (GDP) ratio was at 2.5 per cent, though some states ran fiscal deficits above 3.5 per cent.

·        But the pandemic significantly affected government finances. The study has highlighted 10 vulnerable states based on their debt stock in 2020-21. Their GFD to GSDP ratios were also at 3 per cent or above.

Worrying state finances

·        While revenue collection has been an issue in general, some states are witnessing a decline in their own tax revenue.

·        Revenue expenditure constitutes about 80-90 per cent of total expenditure in these states, which clearly affects their ability to spend on growth-enhancing asset creation.

·        The guarantees extended to state-owned enterprises and the mounting debt of power distribution companies are another source of risks for states.

·        According to estimates, the off-budget borrowings of state governments have increased to about 4.5 per cent of GDP.

·        Projections suggest that most states would have a debt-GSDP ratio of over 30 per cent by 2026-27.

·        Punjab is likely to be in the worst position with debt in excess of 45 per cent of GSDP.

·        The end of the compensation regime under the goods and services tax would further weaken the fiscal position of the states.

·        An unsustainable level of debt in some of the large states would not only affect growth prospects, but could also pose risks to macroeconomic stability.

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