The finances of Indian state governments are facing the risk of getting derailed following the rising level of debts and guarantees issued by them amid the Covid-19 pandemic, Reserve Bank of India said.

Before the pandemic broke out, states have budgeted their consolidated gross fiscal deficit at 2.8% of GDP in 2020-21 with about half of the states having budgeted the ratio at or above the 3% threshold.

“The COVID-19 pandemic may alter budget estimates significantly, eroding the gains of consolidation secured in the preceding three years. The associated increase in indebtedness, coupled with persisting losses of power distribution companies and rising guarantees, slants risks to state finances to the downside, going forward,” RBI said in its report

The direction of possible revision is evident from the fact that the average for states presenting their budget before the outbreak of the pandemic is 2.4%, while the average for the balance number of states that made post-outbreak budget presentations is 4.6% of GSDP, RBI said.

India has seen the second largest caseload in the world and the Covid-19 curve is yet to flatten on a sustained basis.

About a quarter of GDP already lost in the June quarter while the contraction is estimated at close to 10% in the second quarter, public finances have been subjected to severe strains. “States have been at the forefront in the fight against the pandemic and the public health crisis it has spawned, besides the biggest migration in the world,” RBI said in its report on state finances released Tuesday.

The central bank expressed concerns over possible fall in state revenues with stamp duties, which are a major source of revenue under states’ direct taxes, are likely to witness a shortfall following contraction in construction activity, reverse migration of labourers and social distancing norms.

Apart from the direct economic impact in the top six states, RBI said that the loss of employment could be significant going forward for some of the other low-investment states like Uttar Pradesh, Bihar, West Bengal and Rajasthan, which had seen a large chunk of migration for overseas employment in recent years.

RBI laid importance on the quality of spending by state governments for a turnaround. “The next few years are going to be challenging for the states. They have played an important role in the frontline of the defence against the pandemic. Going forward, they need to remain empowered to provide growth impulses to the Indian economy and build resilience against future pandemics as well,” it said.

News Source: Livemint


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