Much has been written on the trends in economic growth in 2021-22 relative to the period before the pandemic. However, most of the fiscal analysis has focused on comparing the current year to 2020-21, which paints an extraordinarily rosy picture. Compared to the pre-pandemic period, there is a clear difference in the financial trends of the Government of India (GoI) and state governments. Moreover, even across states, the use of facilities and tools offered by the RBI has varied significantly this year, which means that increased liquidity is not a universal trend. Furthermore, the end of GST compensation – it will sharply impact states with substantial structural dependence on such flows – is a potential source of greater inter-state divergence from 2022-2023 onwards.
On an encouraging note, the Centre’s fiscal deficit stood at Rs 5.5 trillion in April-October 2021, down from the Rs 7.2 trillion pre-pandemic level (April-October 2019), with incremental revenues exceeding expenditure. Despite potential revenue from excise and customs relief, we expect the Centre’s net revenue receipts to exceed budget estimates by Rs 1.7 trillion due to strong performance of direct taxes and GST and substantial surplus transfer from RBI.
By the end of October, 52 percent of the entire year’s expenditure budget had been met. The second Supplementary Demands for Grants has generated substantial net cash outlay of Rs 3 trillion. We expect a part of this to be absorbed through savings in other demands, thereby neutralizing the impact on the fiscal deficit. However, disappointingly, the realization of the proceeds of the disinvestment of Bharat Petroleum Corporation Limited and the IPO of Life Insurance Corporation seems increasingly impossible this year. In the absence of such inflows, the fiscal deficit could be Rs 16.0-17 lakh crore, which is higher than the budget estimate of Rs 15.1 lakh crore.
In contrast to the compression displayed by the Indian government, the fiscal deficit of 22 state governments, whose provisional fiscal data is available, widened to Rs 3.2 trillion in the first seven months of this year, up from the pre-Covid level of Rs 2.3 trillion. , But, this was not due to a meaningful jump in spending. The combined own tax and non-tax revenues of 22 state governments increased by just 4.2 percent compared to pre-pandemic levels.
Worryingly, central transfers to states fell by Rs 0.9 trillion, with the fall split almost equally between grants and tax transfers, leading to an expansion in states’ fiscal deficits. The decline in grants was partly structural, with 40 per cent due to lower GST compensation inflows. The reason is simple – till 2019-20, the entire GST compensation was financed by cess collection, which was booked by the states under grants from the Centre. However, from 2020-21 onwards, a portion of the GST compensation is being financed through back-to-back loans from the Center, which enters the accounts of the state as a financial item.
Despite a healthy expansion in Centre’s tax revenue, the monthly pattern of transfers to states was such that it led to a decline in total inflows relative to pre-pandemic levels during April-October this year. To address this discrepancy, the Center doubled transfers to states to Rs 951 billion in November, from Rs 475 billion in the previous four months.
After releasing the entire Rs 1.6 trillion GST compensation loan to states by October, it released a Rs 170 billion GST compensation grant from cess collection to states in November 2021. Higher devolution of taxes, and additional transfer of cess should have supported the cash flows of the states in the third quarter of this year. This was reflected in the aggregate gross market borrowings across all states falling behind their indicated levels. Further, utilization of Ways and Means Advances (WMA) facilities by State Governments/UTs from RBI decreased from 188 days in September to 150 days in October 2021. Nevertheless, some states like Andhra Pradesh, Jammu and Kashmir, Manipur and Telangana have repeatedly used the WMA facility from RBI for more than 25 days per month, over several months so far in FY 2022.
At first glance, it appears that there has been a steady decline in cash flows for specific states. However, it may also indicate a deliberate change in strategy to take advantage of this relatively cheap source of funds (the cost is equal to the repo rate if the balance is outstanding for three months, after which the rate rises to the repo plus 1 per cent). ), the blur attached to the use of this window by shrinking.
Looking ahead, we expect that in addition to the compensation for the first quarter of February-March 2021-22 and 2022-23, pending GST compensation for the previous and current year will be released by the Center to the states next year. quarter of the original compensation period. Such transfers will boost the cash flows of the states in the coming year. This will provide them with a somewhat soft landing after the compensation period ends, giving them a few more months to adjust to the new financial reality.
The author is Chief Economist, ICRA
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