States Budget to get impacted due to power reforms: RBI

08 Apr 2016 Evaluate

The Reserve Bank of India (RBI) has came up with analysis and an assessment of the finances of state governments, highlighting several issues which are likely to have implications for state finances in the immediate to medium-term. The report has said that at the consolidated level, states budgeted for a turnaround in fiscal performance during 2015-16 from the deterioration that set in during the earlier two years. This is sought to be achieved by increasing the surplus in the revenue account and a marginal decline in capital outlay (as a proportion to GDP).

The main features of the report titled “State Finances: A Study of Budgets of 2015-16” are:

The quality of expenditure is key to sub-national level fiscal consolidation to reap efficiency and welfare gains while smoothing the effects of fiscal adjustment.
Empirical analysis indicates that expenditure on social and physical infrastructure can have growth augmenting effects.
The quality of expenditure of most Indian states has been improving following the enactment offiscal responsibility legislations.
States need to prioritise expenditure on physical and social infrastructure and economise on nonessential heads.
From a medium term perspective, enduring improvements in the quality of states’ finances hinges around the revival of state level public enterprises (SLPEs), improving the viability of Discoms and rationalisation of centrally sponsored schemes.

The Chapter IV of the report explored some issues which are likely to have a bearing on the quality of states’ expenditure in the medium term; reform of state-level public enterprises, the goods and services tax and the Ujwal Discoms Assurance Yojana (UDAY) scheme. It stated that India`s power reforms are likely to put pressure on state governments’ budgets, potentially forcing them to cut spending needed to support economic growth.

Earlier the government had announced a plan in November providing for states participating in the programme to convert up to 75 percent of the 4.3-trillion-rupee ($64.6-billion) loans and debt held by their utilities into bonds and assume all interest payments and redemptions. It further pointed that Outstanding debt of Discoms has increased from about Rs 2.4 lakh crore in 2011-12 to about Rs 4.3 lakh crore in 2014-15, with interest rates in the range of 14-15 per cent. If states take over 75 per cent of Discom’s debt under UDAY, it may reduce the latters’ interest burden to around 8-9 per cent, thus improving overall efficiency.

The RBI has said that although the effect may not be instantaneous, state finances may come under stress in the coming years on account of burgeoning liabilities due to takeover of 75 per cent of the existing debt of Discoms. This would considerably reduce the fiscal space of states which might lead to curtailment of capital expenditure with an adverse impact on growth. Furthermore, the interest burden of states would inflate with immediate effect, destabilizing fiscal outcomes and resulting in a deviation from the fiscal consolidation path as well as the targets set by the FC-XIV.

The estimated combined fiscal deficit of states would fall to 2.4 percent of gross domestic product in the financial year ending in March 2016 from 2.9 percent the year before. But it forecast a sharp cut in the small savings rate announced by the government would increase states` market borrowing, as the proceeds from these deposits were shared between the central government and the states.

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States Budget to get impacted due to power reforms: RBI

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