States must reset spending, cut freebies: SBI report


States currently seem to be living beyond their means, needing to rationalize spending priorities in line with revenue generation, Ghosh says

States currently seem to be living beyond their means, needing to rationalize spending priorities in line with revenue generation, Ghosh says

Several states are spending heavily on populist programs like farm loan waivers, according to a report by the State Bank of India, and with the center’s GST compensation expiring in June, they are having to reprioritize spending according to revenue.

In some cases, the center’s Goods and Services Tax (GST) revenue accounts for more than a fifth of a state’s tax revenue, while it has itself been spent on “economically unsustainable” giveaways, according to Soumya Kanti Ghosh, the group’s chief economic adviser State Bank of India said. in the report

According to the report, Telangana has allocated 35% of revenue to fund populist programs, while Rajasthan, Chhattisgarh, Andhra Pradesh, Bihar, Jharkhand, West Bengal and Kerala have pledged to spend 5-19% of their revenue on such programs, he said, adding that the percentage of a state’s own tax revenue is as high as 63% for some states.

“Obviously States seem to be living beyond their means at this time and that is imperative [they] streamline their spending priorities in line with revenue,” Mr Ghosh said.

It was found that some states had requested a five-year extension of the GST compensation scheme – which was introduced at the time the indirect tax regime was introduced in 2017.

Meanwhile, the report said states’ fiscal positions had been a collateral casualty of the pandemic, according to an analysis of 18 state budgets that suggested the average fiscal deficit as a percentage of state gross domestic product (GSDP) had been revised after up 0.50% to over 4% in FY22.

Six states had reported fiscal deficits of more than 4% of the GSDP, seven states had exceeded their budgeted target, while 11 states were able to keep their fiscal deficits equal to or below their budgeted figures in FY22, the analysis showed.

The budget deficits of Bihar (8.3% of GSDP or £54,327bn above its Budget Estimate or BE) and Assam (4.5% of GSDP or £21,935bn above its BE) significantly exceeded their FY22 budget deficit according to revised estimates, while Arunachal Pradesh, Jharkhand, Kerala, Maharashtra and Rajasthan are among the states with a higher budget deficit than their BE (Budget Estimate), according to the report.

For FY23, the report showed that states had budgeted a lower budget deficit of 3.4%. Mr Ghosh posed some tough questions about the final results given the constraints on revenue, compliance with fiscal discipline and the hyper-adventurousness being embraced by a select few states.

From a growth perspective, he said Andhra Pradesh, Assam, Gujarat, Haryana, Maharashtra, Rajasthan, Telangana and West Bengal showed much higher real GSDP growth than the country’s overall GDP growth.

However, the SBI report raised a dichotomy in the numbers, with the author questioning why GSDP was higher than national GDP growth for 17 states. However, such gaps have always existed.

In terms of investment, FY22 saw capital expenditure growth of 36.2%, fueled by demand for upscale healthcare infrastructure, but FY23 is expected to see a sharp moderation in growth in this regard, to average growth of 13 .8% for 21 states, he said.

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