Context: The pandemic has delivered a “scissor cut” to the government finances.
What is the current scenario?
- Economic output and government revenues are shrinking.
- The government has to spend more to safeguard lives and livelihoods.
- Widening deficit.
- Most of state’s revenue come from center which changes their debt servicing ability for the worse.
What are the recent issues?
- Revenue side:
- In the first half of fiscal the center’s net revenue (tax and non-tax) collection stood at 27.3% of budget for the full fiscal year compared to 41.6% of previous fiscal year.
- Revenue collections in the first half of the year were down to 32.5% as compared to an average 15% growth over the same period.
- State’s fiscal issue:
- Fiscal data for the year is available only for the eleven non special category states.
- Revenue of these states is down by 21.5%.
- Adding center’s transfer to the states then the decline in revenue reduces to 16.5%.
- Shortfall in states’ revenue is much steep than that of center.
- For the eleven states total expenditure and capital spending have contracted by 1.5% and 23.4 % respectively.
- Allocation for pension and subsidies down by 10% and 20%.
- Since health is State subject, state will have to shoulder major part of health expenditure burden on account of the pandemic.
- Cutting capital expenditure:
- Both center and state have cut their capital expenditure.
- This is worrying as states undertake more as they have more than 60% of the overall general government capital expenditure.
- For instance, in 2019-20, capital expenditure by states stood at rs 4.97 lakh crore down by 20%.
- Low capacity utilization: for instance, it was 71.9 % in the previous year which is down to 58.6 %.
What are the consequences?
- Reduces Center’s and states’ ability to invest and lift the economy.
- Need of more borrowing.
- Centre’s total expenditure has been declined by 0.6 % which led to 11.6% decline in capital expenditure with revenue expenditure by 1 %.
- To maintain states ‘spending government has forced them to increase borrowing which has led to increase in market borrowing by 50%.
- Rising debt level of states. For instance, overall government general debt stood at nine year high.
- Centre’s debt to GDP is declining.
- Ratio of interest payment to revenue receipts is also declining which raises question on sustainability of debt.
- The private sector will remain wary of investing as demand uncertainty continues.