States fiscal deficit at 3.4% of GDP in 2016-17, GST to improve finances: RBI

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SPK Business Desk: The Goods and Services Tax (GST) scheduled to be rolled out from July will improve state finances, the Reserve Bank of India said on Friday, estimating a higher-than-expected average deficit at 3.4% of GDP during 2016-17.

Although states’ fiscal deficit widened to 3.4% as against the budgeted 3%, RBI termed overall fiscal position as “sustainable” in the long run while counting on the GST as a big positive for finances.

In 2015-16, the gross state fiscal deficit (GSFD) came at 3.6% after revised estimates against a budgeted estimate of 2.6%.

“Despite the increase in the debt burden of the states in recent years, the overall fiscal position is found to be sustainable in the long run,” RBI said in its annual report on state finances.

A bulk of the widening was attributed to the Uday Bonds under which ailing electricity discoms were bailed out, and the RBI said excluding the Uday impact the GSFD would have been 2.7%.

The consolidated GSFD is estimated to go down to 2.6% in FY18, it said.
Data from 25 biggest states was used to arrive at the figures, and those excluded include Punjab and a few states in the north east.

It can be noted that analysts recently raised concerns over the states’ increasing fiscal deficits, even as the Centre limits its number.

The RBI said the introduction of Goods and Services Tax (GST) will be one of the biggest advantages for the states as they seek to narrow down the GSFD.
“Due to prevailing uncertainty about the revenue outcome from the GST implementation, the outlook for revenue receipts of states could turn uncertain. There is, however, the cushion of compensation by the Centre for any loss of revenue for the initial five years,” it said.
“Empirical assessment of the inter-temporal budget constraint in a panel data framework covering 20 Indian states for the period 1980-81 to 2015-16 indicates sustainable debt position of states in the long run,” it said.

The broad way of examining a state’s sustainability is to compare the cost of borrowing with the GSDP growth, and as long as the GSDP growth number is higher, there is no cause of worry, it said.

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