Early this week, the Comptroller and Auditor General (CAG) of India tabled a report on the finances of Uttar Pradesh for the financial year 2020-21. A few days prior to that, on May 26, the budget for Uttar Pradesh for 2022-23 was presented, along with which the final audited expenditure and receipt figures for the year 2020-21 were released. The year 2020-21 presented a two-fold challenge for states – loss in revenue due to impact of COVID-19 pandemic and lockdown, and the need for increased expenditure to support affected persons and economic recovery. CAG noted that Uttar Pradesh’s GSDP grew by 1.05% in 2020-21 as compared to a growth of 6.5% in 2019-20. The state reported a revenue deficit of Rs 2,367 crore in 2020-21 after reporting revenue surplus for 14 successive years since 2006-07. Revenue deficit is the excess of revenue expenditure over revenue receipts. This blog looks at the key trends in the finances of Uttar Pradesh in 2020-21 and certain observations by CAG on fiscal management by the state.
Spending and Deficits in 2020-21
Underspending: In 2020-21, total spending by the state was 26% less than the budget estimate presented in February 2020. In sectors such as water supply and sanitation, the actual expenditure was 60% less than the amount budgeted, while in agriculture and allied activities only 53% of the budgeted amount was spent. CAG observed that in 251 schemes across 57 departments, the state government did not incur any expenditure in 2020-21. These schemes had a budget provision of at least one crore rupees, and had cumulative allocation of Rs 50,617 crore. These included schemes such as Pipe Drinking Water Scheme in Bundelkhand/Vindhya and apportionment of pension liabilities. Moreover, the overall savings due to non-utilisation of funds in 2020-21 was 27.28% of total budget provisions. CAG observed that the budgetary provisions increased between 2016 and 2021. However, the utilisation of budget provisions reduced between 2018-19 and 2020-21.
Pattern of spending: CAG observed that in case of 12 departments, more than 50% of the expenditure was incurred in March 2021, the last month of the financial year. In the civil aviation department, 89% of the total expenditure was incurred in March while this figure was 62% for the social welfare department (welfare of handicapped and backward classes). CAG noted that maintaining a steady pace of expenditure is a sound practice under public financial management. However, the Uttar Pradesh Budget Manual has no specific instructions for preventing such bunching of expenditure. The CAG recommended that the state government can consider issuing guidelines to control the rush of expenditure towards the closing months of the financial year.
Management of deficit and debt: As a measure to mitigate the impact of COVID-19, an Ordinance was promulgated in June 2020 to raise the fiscal deficit limit from 3% of GSDP to 5% of GSDP for the year 2020-21. Fiscal deficit represents the gap between expenditure and receipts in a year, and this gap is filled with borrowings. The Uttar Pradesh Fiscal Responsibility and Budget Management Act, 2004 (FRBM Act) passed by Uttar Pradesh Assembly specifies the upper limit for debt and deficits. The Ordinance thus permitted the state government to borrow more to sustain its budget expenditure. The fiscal deficit of the state in 2020-21 was 3.20% of GSDP, well below the revised limit. At the same time, the state’s outstanding debt to GSDP in 2020-21 was 32.77% of GSDP, above the target of 32% of GSDP set under the FRBM Act. Outstanding debt represents accumulation of debt over the years.
Table 1: Spending by Uttar Pradesh in 2020-21 as compared to Budget Estimates (in Rs crore)
|
Particular |
2020-21 BE |
2020-21 Actuals |
% change from BE to Actuals |
|
Net Receipts (1+2) |
4,24,767 |
2,97,311 |
-30% |
|
1. Revenue Receipts (a+b+c+d) |
4,22,567 |
2,96,176 |
-30% |
|
a. Own Tax Revenue |
1,58,413 |
1,19,897 |
-24% |
|
b. Own Non-Tax Revenue |
31,179 |
11,846 |
-62% |
|
c. Share in central taxes |
1,52,863 |
1,06,687 |
-30% |
|
d. Grants-in-aid from the Centre |
80,112 |
57,746 |
-28% |
|
Of which GST compensation grants |
7,608 |
9,381 |
23% |
|
2. Non-Debt Capital Receipts |
2,200 |
1,135 |
-48% |
|
3. Borrowings |
75,791 |
86,859 |
15% |
|
Of which GST compensation loan |
- |
6,007 |
- |
|
Net Expenditure (4+5+6) |
4,77,963 |
3,51,933 |
-26% |
|
4. Revenue Expenditure |
3,95,117 |
2,98,543 |
-24% |
|
5. Capital Outlay |
81,209 |
52,237 |
-36% |
|
6. Loans and Advances |
1,637 |
1,153 |
-30% |
|
7. Debt Repayment |
34,897 |
26,777 |
-23% |
|
Revenue Balance |
27,451 |
-2,367 |
-109% |
|
Revenue Balance (as % of GSDP) |
1.53% |
-0.14% |
|
|
Fiscal Deficit |
53,195 |
54,622 |
3% |
|
Fiscal Deficit (as % of GSDP) |
2.97% |
3.20% |
Note: A negative revenue balance indicates a deficit. The actual fiscal deficit reported by Uttar Pradesh for 2020-21 in 2022-23 budget was 2.8% of GSDP. This difference was due to higher GSDP figure reported by the state.
Sources: Uttar Pradesh Budget Documents of various years; CAG; PRS.
Finances of State Public Sector Undertakings
Public sector undertakings (PSUs) are set up by the government to discharge commercial activities in various sectors. As on March 31, 2021, there were 115 PSUs in Uttar Pradesh. CAG analysed the performance of 38 PSUs. Out of these 38 PSUs, 22 companies earned a profit of Rs 700 crore, while 16 companies posted a loss of Rs 7,411 crore in 2020-21. Note that both the number of PSUs incurring losses and the quantum of losses has decreased since 2018-19. In 2018-19, 20 PSUs had reported losses worth Rs 15,219 crore.
Figure 1: Cumulative losses incurred by Uttar Pradesh PSUs (Rs crore)
Sources: CAG; PRS.
Losses of power sector PSUs: Three power sector PSUs—Uttar Pradesh Power Corporation Limited, Purvanchal Vidyut Vitran Nigam Limited, and Paschimanchal Vidyut Vitran Nigam Limited—were the top loss incurring PSUs. These three PSUs accounted for 73% of the total losses of Rs 7,411 crore mentioned above. Note that as of June 2022, for each unit of power supplied, the revenue realised by UP power distribution companies (discoms) is 27 paise less than cost of supply. This is better than the gap of 34 paise per unit at the national level. However, the aggregate technical and commercial losses (AT&C) of the Uttar Pradesh discoms was 27.85%, considerably higher than the national average of 17.19%. AT&C losses refer to the proportion of power supplied by a discom for which it does not receive any payment.
Off-budget borrowings: CAG also observed that the Uttar Pradesh government resorted to off-budget borrowing through state owned PSUs/authorities. Off budget borrowings are not accounted in the debt of the state government and are on books of the respective PSUs/authorities, although, debt is serviced by the state government. As a result, the outstanding debt reported in the budget does not represent the actual debt position of the state. CAG identified off-budget borrowing worth Rs 1,637 crore. The CAG recommended that the state government should avoid extra-budget borrowings. It should also credit all the loans taken by PSUs/authorities on behalf of and serviced by the state government to state government accounts.
Management of Reserve Funds
The Reserve Bank of India manages two reserve funds on the behalf of state governments. These funds are created to meet the liabilities of state governments. These funds are: (i) Consolidated Sinking Fund (CSF), and (ii) Guarantee Redemption Fund (GRF). They are funded by the contributions made by the state governments. CSF is an amortisation fund which is utilised to meet the repayment obligations of the government. Amortisation refers to payment of debt through regular instalments. The interest accumulated in the fund is used for repayment of outstanding liabilities (which is the accumulation of total borrowings at the end of a financial year, including any liabilities on the public account).
In line with the recommendation of the 12th Finance Commission, Uttar Pradesh created its CSF in March 2020. The state government may transfer at least 0.5% of its outstanding liabilities at the end of the previous year to the CSF. CAG observed that in 2020-21, Uttar Pradesh appropriated only Rs 1,000 crore to the CSF against the requirement of Rs 2,454 crore. CAG recommended that the state government should ensure at least 0.5% of the outstanding liabilities are contributed towards the CSF every year.
GRF is constituted by states to meet obligations related to guarantees. The state government may extend guarantee on loans taken by its PSUs. Guarantees are contingent liabilities of the state government, as in case of default by the company, repayment burden will fall on the state government. GRF can be used to settle guarantees extended by the government with respect to borrowings of state PSUs and other bodies. The 12th Finance Commission had recommended that states should constitute GRF. It was to be funded through guarantees fees to meet any sudden discharge of obligated guarantees extended by the states. CAG noted that Uttar Pradesh government has not constituted GRF. Moreover, the state has also not fixed any limits for extending guarantees.
For an analysis of Uttar Pradesh’s 2022-23 budget, please see here.
To mitigate the spread of coronavirus in India, the central government imposed a nation-wide lockdown on March 25, 2020. The lockdown necessitated the suspension of all economic activities, except the ones classified as ‘essential’ from time to time, and the ones that can be carried out from home. As a result, all economic activities which require persons to travel or work outside home, such as manufacturing of non-essential goods and construction, have stopped since then. While this has resulted in a loss of income for many individuals and businesses, the ongoing 40-day lockdown is also going to severely impact the revenue of the central and state governments, primarily the tax revenue that they would have generated from all such economic activities.
This note discusses the possible effect of the lockdown on the revenue of the central and state governments in 2020-21. At this stage, the effect of the pandemic and the lockdown are difficult to estimate. We do not know whether there will be partial restrictions when the current lockdown ends on 3rd May or the possibility of further action during the year. Therefore, this note can be used as a first estimate to compute the impact under various scenarios. For example, a reader who believes that the effect on GDP growth would be different than the IMF’s estimate used below can extrapolate the numbers to fit his assumptions.
The central government and most of the state governments passed their budget for the financial year 2020-21 during February-March 2020, before the lockdown. The central government estimated a 10% growth in the country’s nominal GDP in 2020-21, and more than half of the states estimate their nominal GSDP growth rate in the range of 8%-13%. Due to the unforeseen impact of the lockdown on the economy, the 2020-21 GDP growth rates are expected to be lower than these estimates. As a result, the tax revenue that the central and state governments will be able to generate are expected to be much lower than the budgeted estimates, during the period of lockdown.
Centre’s revenue
Table 1 shows the revenue expected by the central government from various sources in 2020-21. 73% of the revenue (Rs 16.36 lakh crore) is expected to come through taxes. Because of the impact of lockdown, the actual tax revenue realised at the end of the year could be much lower, depending on how much the nominal GDP growth in 2020-21 gets affected. To estimate the impact on tax revenue, we assume that the tax-GDP ratio (i.e. an estimate of the tax generated out of each unit of economic activity) in 2020-21 will remain the same as the budget estimate. This may be a conservative estimate of loss of revenue due to lockdown as many permitted activities such as agriculture, government services and essential services have zero or lower-than-average taxes.
Based on this assumption, a 1%-point fall in the nominal GDP growth rate could decrease centre’s net tax revenue by about Rs 15,000 crore in 2020-21, i.e. 0.7% of its total revenue. The IMF has projected GDP growth for 2020-21 at 1.9%; given the inflation target of 4%, nominal GDP growth could be about 6%. In that scenario where the nominal GDP growth falls by 4% point from 10% to 6% in 2020-21, net tax revenue loss could be about Rs 60,000 crore (2.7% of total revenue). As mentioned above, the tax-GDP ratio would likely be lower than the budget estimate because of the type of activities permitted during the lockdown. This would increase the adverse impact on tax revenue.
There is a further assumption being made above regarding tax-GDP. While GST tends to move with overall GDP, direct taxes would depend on income growth of individuals and profit growth of companies. In a lower GDP growth environment, the effect on these two items may be higher than the deceleration of nominal GDP, bringing down the tax-GDP ratio. Further, customs duties depend on the value of imports, which may have a lower growth. This would, to some extent, be mitigated by the increase in the rate of excise duty on petroleum products.
These computations have been made considering the 2019-20 revised estimate as the base and the 2020-21 budget estimate as being realistic when it was made. However, these numbers may also be lower. For instance, if we extrapolate the net tax revenue growth rate of April 2019 to February 2020 (as released by the Controller General of Accounts) to March 2020, the shortfall is of the order of Rs 1,62,000 crore or 11% of the revised estimate. Thus, the shortfall in tax collections in 2020-21 may be significantly higher.
Table 1: Central government's revenue in 2020-21 (Rs crore)
|
Source |
Revenue |
Share in Total Revenue |
|
Net Tax Revenue |
16,35,909 |
73% |
|
Non-Tax Revenue |
3,85,017 |
17% |
|
Dividends and Profits |
1,55,395 |
6.9% |
|
Capital Receipts |
2,24,967 |
10% |
|
Disinvestment |
2,10,000 |
9.4% |
|
Total Revenue |
22,45,893 |
- |
Note: Capital receipts and total revenue do not include borrowings.
Sources: Union Budget Documents; PRS.
Other than taxes, the centre’s receipts consist of non-tax revenue and capital receipts. A significant part of non-tax revenue is from dividends and profits of public sector enterprises (PSEs) and the RBI (Rs 1.55 lakh crore). If profitability gets impacted, then there could be an adverse impact in these figures. The major chunk of capital receipts is budgeted from disinvestment of PSEs (Rs 2.1 lakh crore). Equity markets have declined sharply over the last month. If equity markets remain volatile, the disinvestment process and consequently the disinvestment receipts could get affected. Note that disinvestment receipts were targeted at Rs 2,10,000 crore, significantly higher than the Rs 50,299 crore raised in 2019-20.
Devolution to States
Like the centre, states also rely on taxes for most of their revenue. As per their 2020-21 budget, on an average, nearly 70% of their revenue is estimated to come from taxes (45% from their own taxes and 25% from their share of centre’s taxes). Lower collections in centre’s taxes because of the lockdown will also impact states’ share in them (also known as devolution). Table 2 shows the share of states in centre’s tax revenue and how they could get impacted by a lower economic growth rate due to the lockdown.
Table 2: Impact of lower economic growth during the lockdown on devolution in 2020-21 (Rs crore)
|
State/ UT |
Share in divisible pool (%) |
Devolution |
Impact of 1% point drop in national nominal GDP growth rate on Devolution |
Revenue impact as a percentage of state’s revenue receipts |
|
Andhra Pradesh |
4.11 |
32,238* |
293 |
NA |
|
Arunachal Pradesh |
1.76 |
13,802 |
125 |
0.61% |
|
Assam |
3.13 |
26,776 |
243 |
0.26% |
|
Bihar |
10.06 |
91,181 |
829 |
0.45% |
|
Chhattisgarh |
3.42 |
26,803 |
244 |
0.29% |
|
Delhi |
- |
- |
- |
- |
|
Goa |
0.39 |
3,027 |
28 |
0.21% |
|
Gujarat |
3.4 |
26,646 |
242 |
0.15% |
|
Haryana |
1.08 |
8,485 |
77 |
0.09% |
|
Himachal Pradesh |
0.8 |
6,266 |
57 |
0.15% |
|
Jammu and Kashmir |
- |
15,200 |
138 |
0.16% |
|
Jharkhand |
3.31 |
25,980 |
236 |
0.31% |
|
Karnataka |
3.65 |
28,591 |
260 |
0.14% |
|
Kerala |
1.94 |
20,935 |
190 |
0.17% |
|
Madhya Pradesh |
7.89 |
61,841* |
562 |
NA |
|
Maharashtra |
6.14 |
48,109 |
437 |
0.13% |
|
Manipur |
0.72 |
5,630 |
51 |
0.28% |
|
Meghalaya |
0.77 |
5,999* |
55 |
NA |
|
Mizoram |
0.51 |
3,968 |
36 |
0.37% |
|
Nagaland |
0.57 |
4,493 |
41 |
0.28% |
|
Odisha |
4.63 |
36,300 |
330 |
0.27% |
|
Punjab |
1.79 |
14,021 |
127 |
0.14% |
|
Rajasthan |
5.98 |
46,886 |
426 |
0.25% |
|
Sikkim |
0.39 |
3,043 |
28 |
0.35% |
|
Tamil Nadu |
4.19 |
32,849 |
299 |
0.14% |
|
Telangana |
2.13 |
16,727 |
152 |
0.11% |
|
Tripura |
0.71 |
5,560 |
51 |
0.30% |
|
Uttar Pradesh |
17.93 |
1,52,863 |
1,389 |
0.33% |
|
Uttarakhand |
1.1 |
8,657 |
79 |
0.19% |
|
West Bengal |
7.52 |
65,835 |
598 |
0.33% |
|
Total |
100 |
8,38,710 |
7,624 |
0.22% |
Note: *Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so their devolution data has been computed as the total devolution to states provided in the union budget multiplied by their share. The devolution data for all other states has been taken from the state budget documents, which may not match with the union budget data in case of a few states. Revenue receipts data not available for Andhra Pradesh, Madhya Pradesh, and Meghalaya. The total for revenue receipt share has been computed excluding these three states.
Sources: Union and State Budget Documents; 15th Finance Commission Report for 2020-21; PRS.
State GST
Out of the 45% revenue coming from state’s own taxes, 35% revenue is estimated to come from three taxes – state GST (19%), sales tax/ VAT (10%), and state excise (6%). State GST is levied on the consumption of most goods and services within the state. While state GST is the largest component of states’ own tax revenue, states do not have the autonomy to change tax rates on their own as the rates are decided by the GST Council. Thus, due to lower GST revenue during the lockdown period, if a state wishes to increase GST rates for the remaining part of the year, it cannot do this on its own.
Table 3 shows the possible impact of a 1%-point decrease in the growth rates of nominal GSDP (GDP of the state) and its impact on state GST revenue in the year 2020-21. These estimates are based on the assumption that the tax-GSDP ratio during the lockdown remains same as estimated for the 2020-21 budget. However, as discussed earlier, the tax-GDP ratio for taxes such as GST is likely to decline. The analysis estimates the minimum impact on states’ GST revenue and does not captures its full extent.
Table 3: Impact of lower GSDP growth during the lockdown on state GST revenue in 2020-21 (Rs crore)
|
State/ UT |
State GST revenue |
Impact of 1% point drop in nominal GSDP growth rate on State GST revenue |
Revenue impact as a percentage of state’s revenue receipts |
|
Andhra Pradesh |
NA |
NA |
NA |
|
Arunachal Pradesh |
324 |
3 |
0.01% |
|
Assam |
13,935 |
128 |
0.14% |
|
Bihar |
20,800 |
187 |
0.10% |
|
Chhattisgarh |
10,701 |
97 |
0.12% |
|
Delhi |
23,800 |
215 |
0.39% |
|
Goa |
2,772 |
26 |
0.19% |
|
Gujarat |
33,050 |
292 |
0.18% |
|
Haryana |
22,350 |
198 |
0.22% |
|
Himachal Pradesh |
3,855 |
35 |
0.09% |
|
Jammu and Kashmir |
6,065 |
55 |
0.06% |
|
Jharkhand |
9,450 |
85 |
0.11% |
|
Karnataka |
47,319 |
445 |
0.25% |
|
Kerala |
32,388 |
289 |
0.25% |
|
Madhya Pradesh |
NA |
NA |
NA |
|
Maharashtra |
1,07,146 |
957 |
0.28% |
|
Manipur |
914 |
8 |
0.05% |
|
Meghalaya |
NA |
NA |
NA |
|
Mizoram |
504 |
4 |
0.04% |
|
Nagaland |
541 |
5 |
0.04% |
|
Odisha |
15,469 |
139 |
0.11% |
|
Punjab |
15,859 |
141 |
0.16% |
|
Rajasthan |
28,250 |
255 |
0.15% |
|
Sikkim |
650 |
5 |
0.07% |
|
Tamil Nadu |
46,196 |
410 |
0.19% |
|
Telangana |
27,600 |
242 |
0.17% |
|
Tripura |
1,311 |
12 |
0.07% |
|
Uttar Pradesh |
55,673 |
525 |
0.12% |
|
Uttarakhand |
5,386 |
49 |
0.12% |
|
West Bengal |
33,153 |
298 |
0.17% |
|
Total |
5,65,461 |
5,104 |
0.17% |
Note: Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so data not available. 2020-21 GSDP data for Delhi was not available, so the GSDP growth rate in 2020-21 has been assumed to be the same as the growth rate in 2019-20 (10.5%).
Sources: State Budget Documents; PRS.
Sales tax/ VAT and State Excise
These two taxes have been major sources of revenue for states, estimated to contribute 16% of states’ revenue in 2020-21. With implementation of GST, states can now levy sales tax only on petroleum products (petrol, diesel, crude oil, natural gas, and aviation turbine fuel) and alcohol for human consumption. However, the lockdown has severely impacted the consumption, and thus sale, of all of these goods as most of the transportation is prohibited and businesses selling alcohol are also shut. As a result, the revenue coming from these taxes is likely to see a much larger impact as compared to the other taxes.
In addition, alcohol is also subject to state excise. Table 4 shows the average monthly impact of the lockdown on revenue from state excise. That is, this estimates the loss of revenue for each month of lockdown, with the assumption that there is no production of alcohol for human consumption during such periods.
Table 4: Average monthly impact of the lockdown on state excise revenue in 2020-21 (Rs crore)
|
State/ UT |
State excise revenue |
Average monthly impact on state excise revenue |
Monthly revenue impact as a percentage of state’s revenue receipts |
|
Andhra Pradesh |
NA |
NA |
NA |
|
Arunachal Pradesh |
157 |
13 |
0.06% |
|
Assam |
1,750 |
146 |
0.16% |
|
Bihar |
0 |
0 |
0.00% |
|
Chhattisgarh |
5,200 |
433 |
0.52% |
|
Delhi |
6,300 |
525 |
0.95% |
|
Goa |
548 |
46 |
0.34% |
|
Gujarat |
144 |
12 |
0.01% |
|
Haryana |
7,500 |
625 |
0.69% |
|
Himachal Pradesh |
1,788 |
149 |
0.39% |
|
Jammu and Kashmir |
1,450 |
121 |
0.14% |
|
Jharkhand |
2,301 |
192 |
0.25% |
|
Karnataka |
22,700 |
1,892 |
1.05% |
|
Kerala |
2,801 |
233 |
0.20% |
|
Madhya Pradesh |
NA |
NA |
NA |
|
Maharashtra |
19,225 |
1,602 |
0.46% |
|
Manipur |
15 |
1 |
0.01% |
|
Meghalaya |
NA |
NA |
NA |
|
Mizoram |
1 |
0 |
0.00% |
|
Nagaland |
6 |
0 |
0.00% |
|
Odisha |
5,250 |
438 |
0.35% |
|
Punjab |
6,250 |
521 |
0.59% |
|
Rajasthan |
12,500 |
1,042 |
0.60% |
|
Sikkim |
248 |
21 |
0.26% |
|
Tamil Nadu |
8,134 |
678 |
0.31% |
|
Telangana |
16,000 |
1,333 |
0.93% |
|
Tripura |
266 |
22 |
0.13% |
|
Uttar Pradesh |
37,500 |
3,125 |
0.74% |
|
Uttarakhand |
3,400 |
283 |
0.67% |
|
West Bengal |
12,732 |
1,061 |
0.59% |
|
Total |
1,74,164 |
14,514 |
0.48% |
Note: Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so data not available.
Sources: State Budget Documents; PRS.
Sales tax/VAT is collected from sale of alcohol and petroleum products. We do not have any data on the reduction of sale of these items -- news reports indicating sale of alcohol in some states while petroleum products would be used by providers of essential services. For estimating the impact on sales tax/ VAT revenue, we have assumed the following three scenarios: (i) 40% shortfall in tax collections, (ii) 60% shortfall in tax collections, and (iii) 80% shortfall in tax collections in any month of lockdown. Table 5 shows the average monthly impact of the lockdown on sales tax/ VAT revenue under the three scenarios.
Table 5: Impact of lockdown on sales tax/ VAT revenue in 2020-21 (Rs crore)
|
State/ UT |
Loss of sales tax/ VAT revenue per lockdown month |
As a percentage of state’s revenue receipts |
||||
|
40% shortfall |
60% shortfall |
80% shortfall |
40% shortfall |
60% shortfall |
80% shortfall |
|
|
Andhra Pradesh |
NA |
NA |
NA |
NA |
NA |
NA |
|
Arunachal Pradesh |
9 |
14 |
18 |
0.04% |
0.07% |
0.09% |
|
Assam |
178 |
267 |
356 |
0.19% |
0.29% |
0.39% |
|
Bihar |
194 |
292 |
389 |
0.11% |
0.16% |
0.21% |
|
Chhattisgarh |
138 |
207 |
276 |
0.16% |
0.25% |
0.33% |
|
Delhi |
207 |
310 |
413 |
0.37% |
0.56% |
0.75% |
|
Goa |
41 |
62 |
83 |
0.31% |
0.47% |
0.62% |
|
Gujarat |
774 |
1,162 |
1,549 |
0.48% |
0.72% |
0.95% |
|
Haryana |
357 |
535 |
713 |
0.40% |
0.59% |
0.79% |
|
Himachal Pradesh |
56 |
84 |
112 |
0.15% |
0.22% |
0.29% |
|
Jammu and Kashmir |
50 |
75 |
100 |
0.06% |
0.09% |
0.11% |
|
Jharkhand |
195 |
293 |
391 |
0.26% |
0.39% |
0.52% |
|
Karnataka |
593 |
889 |
1,186 |
0.33% |
0.49% |
0.66% |
|
Kerala |
775 |
1,163 |
1,551 |
0.68% |
1.01% |
1.35% |
|
Madhya Pradesh |
NA |
NA |
NA |
NA |
NA |
NA |
|
Maharashtra |
1,333 |
2,000 |
2,667 |
0.38% |
0.58% |
0.77% |
|
Manipur |
9 |
14 |
18 |
0.05% |
0.08% |
0.10% |
|
Meghalaya |
NA |
NA |
NA |
NA |
NA |
NA |
|
Mizoram |
3 |
4 |
5 |
0.03% |
0.04% |
0.06% |
|
Nagaland |
9 |
13 |
18 |
0.06% |
0.09% |
0.12% |
|
Odisha |
292 |
438 |
583 |
0.23% |
0.35% |
0.47% |
|
Punjab |
186 |
279 |
372 |
0.21% |
0.32% |
0.42% |
|
Rajasthan |
700 |
1,050 |
1,400 |
0.40% |
0.61% |
0.81% |
|
Sikkim |
7 |
11 |
15 |
0.09% |
0.14% |
0.18% |
|
Tamil Nadu |
1,868 |
2,802 |
3,736 |
0.85% |
1.28% |
1.70% |
|
Telangana |
880 |
1,320 |
1,760 |
0.61% |
0.92% |
1.23% |
|
Tripura |
15 |
22 |
30 |
0.09% |
0.13% |
0.17% |
|
Uttar Pradesh |
943 |
1,414 |
1,886 |
0.22% |
0.33% |
0.45% |
|
Uttarakhand |
66 |
98 |
131 |
0.15% |
0.23% |
0.31% |
|
West Bengal |
251 |
377 |
503 |
0.14% |
0.21% |
0.28% |
|
Total |
10,130 |
15,195 |
20,260 |
0.34% |
0.51% |
0.67% |
Note: Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so data not available.
Sources: State Budget Documents; PRS.
How much can GST compensation help?
The shortfall in state GST revenue could get offset by the GST compensation provided to states by the central government. The GST (Compensation to States) Act, 2017, requires the central government to provide compensation to states for loss of revenue arising due to GST implementation until 2022. For this purpose, the Act guarantees a 14% annual growth rate in state GST revenue, which is much higher than the growth likely in the year 2020-21. As a result, the central government would be required to provide states a compensation equivalent to the shortfall in growth in their state GST revenue, in comparison to the 14% growth.
However, it is likely that there may not be sufficient funds to provide compensation to states in 2020-21. Compensation to states is given out of the GST Compensation Fund, which consists of collections of a cess levied specifically to generate funds for this purpose. The cess is levied on coal, tobacco and its products, pan masala, automobiles, and aerated drinks. The cess collections may see a shortfall as the sale of many of these goods is likely to be affected this year. Note that domestic automobile sales declined 18% in 2019-20 over the previous year while coal production stayed constant.
In the 2020-21 budget, the central government estimated to provide Rs 1,35,368 crore as compensation to states, which is close to the total compensation estimated by states in their budgets. However, due to the lockdown, the cess collections financing these grants are estimated to decrease, whereas the compensation requirement of states is estimated to increase due to lower GST collections. While there is a risk that any incremental requirement may not be met, states’ revenue can see a much larger impact if cess collections are not even sufficient to meet their existing amounts as per the 2020-21 budgets (Table 6). States, on an average, depend on GST compensation grants for 4.4% of their revenue in 2020-21. However, states such as Gujarat, Punjab, and Delhi expect almost 14-15% of their revenue in 2020-21 to come in the form of GST compensation grants.
Table 6: GST compensation grants estimated by states in 2020-21 (Rs crore)
|
State/ UT |
GST Compensation |
GST compensation as a percentage of state’s revenue receipts |
|
Andhra Pradesh |
NA |
NA |
|
Arunachal Pradesh |
0 |
0.0% |
|
Assam |
1,000 |
1.1% |
|
Bihar |
3,500 |
1.9% |
|
Chhattisgarh |
2,938 |
3.5% |
|
Delhi |
7,800 |
14.1% |
|
Goa |
1,358 |
10.2% |
|
Gujarat |
22,510 |
13.9% |
|
Haryana |
7,000 |
7.8% |
|
Himachal Pradesh |
3,338 |
8.7% |
|
Jammu and Kashmir |
3,177 |
3.6% |
|
Jharkhand |
1,568 |
2.1% |
|
Karnataka |
16,116 |
9.0% |
|
Kerala |
0 |
0.0% |
|
Madhya Pradesh |
NA |
NA |
|
Maharashtra |
10,000 |
2.9% |
|
Manipur |
0 |
0.0% |
|
Meghalaya |
NA |
NA |
|
Mizoram |
0 |
0.0% |
|
Nagaland |
0 |
0.0% |
|
Odisha |
6,200 |
5.0% |
|
Punjab |
12,975 |
14.7% |
|
Rajasthan |
4,800 |
2.8% |
|
Sikkim |
0 |
0.0% |
|
Tamil Nadu |
10,300 |
4.7% |
|
Telangana |
0 |
0.0% |
|
Tripura |
208 |
1.2% |
|
Uttar Pradesh |
7,608 |
1.8% |
|
Uttarakhand |
3,571 |
8.4% |
|
West Bengal |
4,928 |
2.7% |
|
Total |
1,30,894 |
4.4% |
Note: Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so data not available.
Sources: State Budget Documents; PRS.
A similar scenario played out last year when due to the economic slowdown, the cess collections were not sufficient to meet states’ compensation requirements. As a result, states have received the GST compensation only till November 2019. Note that the GST (Compensation to States) Act, 2017 provides that the GST Council can recommend other funding mechanisms for the Compensation Fund. For instance, this can be done when there is a shortfall of money in the Fund for providing compensation to states.
Impact on State Finances
In light of such severe stress on the revenue side, states will have to either cut their budgeted expenditure or increase their borrowings to meet the budget targets. Note that because of the coronavirus pandemic and the lockdown, states are also making unforeseen expenditure in the health sector and for providing relief from the lockdown. As a result, many states have already started working on the former by drawing up plans to defer or cut their planned expenditure, or divert funds for planned expenditure towards these immediate requirements. With relatively less flexibility on the side of revenue expenditure, capital expenditure could see a larger cut in many states. For instance, revenue expenditure includes expenditure committed towards payment of interest, salaries, and pension. On average, this committed expenditure uses up 50% of states’ revenue. However, some states have already gone ahead and deferred or cut the expenditure towards payment of salaries. Also, with private consumption and investment expected to remain sluggish, reduction of government expenditure could lead to a further decline in GDP.
The other option for states is to increase their borrowings. However, states’ borrowings are limited by their FRBM laws at 3% of their GSDP (with a further 0.5% of GSDP if they fulfil some conditions). States also need the consent of the central government to borrow money. While most states had already budgeted their fiscal deficit for 2020-21 near the upper limit, it seems some states do have some fiscal space to borrow more (Table 7). However, with GSDP expected to take a hit because of the lockdown, fiscal deficit as a percentage of GSDP for all states could be higher than budgeted targets, even if they do not make any additional borrowings.
Table 7: Fiscal deficit estimates for 2020-21 as a percentage of GSDP
|
State/ UT |
2019-20 (Revised) |
2020-21 (Budgeted) |
|
Andhra Pradesh |
NA |
NA |
|
Arunachal Pradesh |
3.1% |
2.4% |
|
Assam |
5.7% |
2.3% |
|
Bihar |
9.5% |
3.0% |
|
Chhattisgarh |
6.4% |
3.2% |
|
Delhi |
-0.1% |
0.5% |
|
Goa |
4.7% |
5.0% |
|
Gujarat |
1.6% |
1.8% |
|
Haryana |
2.8% |
2.7% |
|
Himachal Pradesh |
6.4% |
4.0% |
|
Jammu and Kashmir |
NA |
5.0% |
|
Jharkhand |
2.3% |
2.1% |
|
Karnataka |
2.3% |
2.6% |
|
Kerala |
3.0% |
3.0% |
|
Madhya Pradesh |
NA |
NA |
|
Maharashtra |
2.7% |
1.7% |
|
Manipur |
8.9% |
4.1% |
|
Meghalaya |
NA |
NA |
|
Mizoram |
8.3% |
1.7% |
|
Nagaland |
9.0% |
4.8% |
|
Odisha |
3.4% |
3.0% |
|
Punjab |
3.0% |
2.9% |
|
Rajasthan |
3.2% |
3.0% |
|
Sikkim |
4.3% |
3.0% |
|
Tamil Nadu |
3.0% |
2.8% |
|
Telangana |
2.3% |
3.0% |
|
Tripura |
6.2% |
3.5% |
|
Uttar Pradesh |
3.0% |
3.0% |
|
Uttarakhand |
2.5% |
2.6% |
|
West Bengal |
2.6% |
2.2% |
|
Centre |
3.8% |
3.5% |
Note: Andhra Pradesh, Madhya Pradesh, and Meghalaya passed a vote on account, so data not available.
Sources: Union and State Budget Documents; PRS.
