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RBI warns tough yrs ahead for states, calls for charting fiscal path

Cogencis, Tuesday, Oct 27, 2020

NEW DELHI – The Reserve Bank of India has warned state governments face a difficult few years, while also calling on them to chart out a glide path for consolidating their debt.

"The next few years are going to be challenging for the Indian states. They need to remain empowered with effective strategies to drive through these difficult times," the central bank noted in its 'State Finances: A Study of Budgets of 2020-21' report.

The RBI said states' finances had taken a "body blow" in Apr-Sep on account of them being at the forefront of the fight against the COVID-19 pandemic.

As such, their consolidated gross fiscal deficit is projected to cross 4.0% of the GDP in 2020-21 (Apr-Mar) in the base case. This is sharply higher than the budgeted consolidated fiscal deficit of 2.8%.

"Given the clear inter-linkages between growth and tax revenues and considering the fact that tax revenues fall faster than GDP when growth is negative, tax revenues are likely to be reduced for the next few years," the RBI said.

Along with a hit to revenues, states are also expected to see heightened expenditure related to the pandemic as well as a rise in contingent liabilities, such as guarantees.

The economic package announced by Finance Minister Nirmala Sitharaman in mid-May included a 900-bln-rupee liquidity infusion into state power distribution companies, with state government guaranteeing this infusion. According to the RBI, another bailout of these loss-making companies "seems imminent" post the coronavirus crisis.

"In this milieu, state governments may have to face the difficult choice of putting investment projects on hold, but, given the multiplier associated with capital spending, this will inevitably entail growth losses in a vicious circle feeding itself," the RBI said.

The central bank also found that despite India having the highest decentralisation of capital expenditure, spending on these long-term projects often fell short of targets as states cut back on these expenses to meet fiscal targets.

"Keeping in mind the inter-generational burden of debt, it is important for states to chart out a glide path back to fiscal rectitude. Like the centre, states may also consider revising their fiscal legislations by bringing in the desired counter-cyclicality and by incorporating debt as a medium-term anchor," the RBI recommended.  End

Reported by Siddharth Upasani

Edited by Aditya Sakorkar

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