The dependence of states on the central government to meet their financial needs is exorbitant. States in India are likely to pile up debt while Moody’s estimates fiscal deficit at 3.7%.
Projections
Moody’s, credit rating agency, projected the central government’s fiscal deficit at 3.7% of Gross Domestic Product. States fiscal deficit at 3%, making a total fiscal deficit of around 6.7% for 2019-20. This is more than the estimation of 3.4% for 2019. There is an increase of about 28% in states fiscal needs, estimated at Rs 7.5 trillion (3.4% of GDP).
Reasons
The Central government is facing difficulties to meet its fiscal consolidation goals due to increasing state-level deficit. The report accounted for increased spending and slow economic growth for a rising deficit. Gjorgji Josifov, Moody’s Assistant Vice President and Analyst said that with the initiation of GST in 2017, the states have become more dependent on the Central government to meet their financial needs.
GST replaced many indirect taxes, further decreasing states revenues from 52% to 44%. The report added that if there are no immediate policy changes then the states will remain on the current level of deficit, making it difficult to achieve combined fiscal objectives. Besides, the GST revenues did not meet the expectations of the Central government. If things don’t change it will be necessary to provide increased compensation to states. There are certain states like Bihar, Jammu and Kashmir and north-eastern states that depend on the central government for majority of their financial needs.
Actions
Recently, the GST council asked the state officials to come up with suggestions to review the tax rates and give proposals to help in revenue generation. Moody’s reported that the debt-GDP ratio must reach 20% by 2024-25 to meet fiscal responsibility and budget management. This will require serious cuts in expenditure and high addition revenues.
In conclusion, Moody’s brings out the reasons for such a state of the Indian economy through its continued research on the government’s efforts to reduce debts.