States must rein in spending, says State Bank of India report

States must rein in spending, says State Bank of India report

Many states across India are over-spending and need to re-prioritise their expenditure when they lose their central government hand-outs in June, according to a report by the State Bank of India.

Currently, the states receive GST compensation from the government – in some cases representing more than a fifth of a state’s total tax revenues.

Soumya Kanti Ghosh, group chief economic adviser at State Bank of India (SBI), criticised them in the report for spending on “economically unsustainable freebies”.

According to the report, Telangana has committed 35% of revenue receipts to “finance populist schemes”, while Rajasthan, Chhattisgarh, Andhra Pradesh, Bihar, Jharkhand, West Bengal and Kerala have all committed to spend 5%-19% of their revenue receipts on such schemes. Ghosh said that in terms of percentage of a state’s own tax revenues, the figure is as much as 63% in some cases.

“Clearly, states seem to be currently living beyond their means and it is imperative that they rationalise their spending priorities in accordance with revenue receipts,” Ghosh said.

Some states are demanding an extension of the GST compensation scheme – introduced at the time of the roll-out of the indirect tax regime in 2017 – for five more years.

The report said that the pandemic was the reason many states are in such a precarious fiscal situation, with six states reporting a fiscal deficit of more than 4% of GSDP (gross state domestic product).

Seven states had exceeded their budgeted target, while another 11 had been able to keep their fiscal deficit equal to or lower than their budgeted numbers during FY22, the analysis showed.

The fiscal deficit of Bihar (8.3% of GSDP over its budget estimate) and Assam (4.5% of GSDP over its budget estimate) exceeded their fiscal deficit significantly in FY22, while Arunachal Pradesh, Jharkhand, Kerala, Maharashtra and Rajasthan are among the states having higher fiscal deficit than their budget estimate, according to the report.

 

Higher GSDP growth

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

However, the SBI report questioned how the GSDP for 17 states was higher than growth in the national GDP. However, it added that such gaps had previously existed.

In terms of investment, FY22 witnessed a 36.2% growth in capital expenditure, fuelled by the demands to improve and upgrade health infrastructure, but FY23 is set to see a sharp slowdown in growth to an average growth of 13.8% for 21 states, Ghosh said.