States should bring their own fiscal act together

Budgetary Fiscal Deficit of the Center for 2022-23 16.6 trillion, then 6.4% of the estimated GDP, but 6.2% of the expected GDP for 2022-23 269.5 trillion (irrespective of the first quarter figures for this financial year). Gross state borrowing was set at 3.5% of GDP by the Fifteenth Finance Commission (FFC), with an additional 0.5% for power sector reforms. Even if only 60% of that additional offer is reached, the Centre’s total deficit of 3.8% is added to 6.2%, a consolidated deficit of 10% (ex-Ukraine).

This is large, but manageable as long as no other back-door borrowing outside the budget is funding government spending. As it happens, off-budget borrowings at the Center had indeed increased alarmingly since 2016-17, but were (largely) brought on budget in 2020-21. The timing of that on-shoring in the pandemic year 2020-21, when so many revenue and expenditure volumes went off-kilter, was utterly spectacular.

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At the state level it is a different story. They too have been indulging in off-budget borrowings long before 2016-17, but these have not yet been brought on the budget. In March 2022, the Finance Ministry at the Center notified the states that their off-budget borrowings during 2022-21 and 2021-22 (the first two years of the FFC period) would have to be brought on budget during 2022-23 and cut . From their FFC eligibility for the year. This action of the Center is acceptable under Article 293(3) of the Constitution. Therefore, the fresh borrowing of the states would be less than their total permissible limit of 3.5%.

how much less In theory, state budget papers should have contained a list of government borrowings made through state-level public sector undertakings (SPSUs), but no total is readily available. Ananth Narayan, in a research note for the Observatory Group, innovatively estimates off-budget overhang through budget overhang over actual revenue expenditure. This is additional by the states in the last two years 7 trillion. Their assessment process highlights more than just SPSU lending, which is done only for major schemes (such as lending by the Food Corporation of India at the Centre). It also covers the movement of dues to vendors through the practice of delayed payments, eventually leading to other payments being delayed in subsequent years. This form of borrowing from a diverse, changing body of helpless imperative lenders has probably grown over time.

But since states also deal with unfulfilled spending by the simple tool of scrapping small plans, which doesn’t matter from an electoral point of view, instead of borrowing, the estimate borrows more from the budget. even if the stock is estimated 6 trillion, which is still 2.2% of GDP, which would leave states with fresh borrowings of only 1.3% of GDP out of their permissible total of 3.5%. Since this is clearly volatile, the Finance Ministry recently announced that on-shoring would be staggered over the remaining four years of the FFC period, up to 2025-26.

Hanging out of the budget are the off-budget borrowings left by the states before 2020-21 (Other .) 7.5 trillion between 2016-17 and 2019-20). And that leaves two other serious financial threats at the state level.

One is pension, where the transition to a defined contribution system at the state level has not been well. In a recent notification, the finance ministry has allowed states to take additional borrowings to encourage that transition. But this alone will not be enough. The new system requires some restructuring, or else the states will revert to the already defined benefit system with wage index, which is a uniquely Indian and financially disastrous feature.

Second is the pathetic condition of the power sector, which comes under the jurisdiction of the states under the Constitution. Power distribution companies (discoms) are unable to pay their suppliers (gencos) due to unchanged tariffs. States promise to reimburse subsidies to discoms, which provide the best partial cover, and are often never paid. Discoms cover their losses by borrowing from public sector banks or more recently from non-bank financial intermediaries like Power Finance Corporation (PFC). These loans are either explicitly or indirectly underwritten. Alternatively, DISCOMs pay dues only to Gencos, which is currently estimated 1 trillion.

In a recent action on 18 August, the power ministry barred access with immediate effect from power exchanges to 13 states where they buy their power, until they had cleared their existing bills to Gencos, 5,100 crores. A June notification stipulated a payment and penalty schedule for unpaid dues in 48 equated monthly installments to Gencos. Since further loans from PFC are also unlikely, this payment of dues will have to be funded by the states.

And finally, there is the latter excess of Ukraine in the Centre’s fiscal deficit – about 1% of GDP. This is the time of examination.

Indira Rajaraman is an economist.

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