For the first time in history, India entered into a technical recession with gross domestic product (GDP) growth remaining in negative territory for two successive quarters in 2020-21.
However, with a quarterly growth of 0.4 per cent in the third quarter, India has now exited that phase.
As a result, both the Centre as well as states are grappling with serious resource crunch with collapse in tax receipts and a significant rise in expenditures.
Economists at the State Bank of India (SBI) analysed finances of 13 states and estimated an average fiscal deficit of 4.5 per cent for financial year 2021. While, for FY22, states have budgeted an average fiscal deficit of 3.3 per cent.
At the same time, the consolidated fiscal deficit of the Centre and states is projected to be around 12.7 per cent of gross domestic product (GDP).
Fiscal position of states
Significant reduction in tax receipts and increase in expenditures have generated unprecedented pressures on fiscal position for states.
While some states have been impacted quicker and harder, the effect has been relatively lesser in states with better availability and accessibility of healthcare resources.
In actual terms, fiscal deficit for FY21 has been revised upwards by Rs 1.85 lakh crore to Rs 5.8 lakh crore. For FY22, the combined fiscal deficit for 13 states is projected at Rs 5 lakh crore.
SBI economists made two observations about gross state domestic product (GSDP). Firstly, it found differences in state estimates and revised estimates provided by each state in their budgets.
In West Bengal, Uttar Pradesh, Madhya Pradesh and Karnataka there was a difference between share estimates and budgeted GSDP. While, in states like Rajasthan, Jharkhand, Odisha and Kerala the difference was on the lower side.
Secondly, it observed that budgeted GSDP estimates of states like Uttar Pradesh, West Bengal, Madhya Pradesh and Rajasthan shows expansion in FY21. In such a scenario, all-India GDP contraction of 8 per cent — as predicted by NSO — would be much lower.
Impact on per capita GSDP
Analysis showed that the pandemic has led to a national level decline in per capita GDP by almost Rs 7,200 in FY21 from FY20.
However, states like Karnataka, UP, Bengal had their per capita GSDP increase by over Rs 10,000 in FY21, primarily because of the variance in unrealised taxes.
An increase has also been witnessed on per capita debt as governments had to borrow more to combat the Covid-19 pandemic. Karnataka, Jharkhand, Madhya Pradesh, Uttarakhand saw their per capita debt soaring over 20 per cent or over Rs 60,000 per head in the next fiscal.
Hence, average per capita income of 13 major states for the 3 year period ended (FY22 budget estimates) grew by 7.1 per cent, whereas per capita debt of all these states expanded by 16.4 per cent.
States’ revenue from goods and services tax as well as value added taxes have fallen more sharply than anticipated in FY21 budgets.
While revised estimates show that the CGST+SGST figures are 21.2 per cent lower than the budgeted figures, state VAT and sales tax are seeing a decline of 14.7 per cent, due to lower crude prices and reduced consumption in the initial months of FY21.
To bridge the gap, the states have curtailed capital expenditure by a sharp 11.3 per cent from what was proposed initially in FY21 budgets, but have budgeted for 37 per cent spike in FY22.
However, compared to capex, revenue expenditure RE FY21 has declined at a slower pace.
Expenditure on healthcare
The pandemic has proved to be an opportunity for states to being about changes in healthcare sector.
However, of the 13 states analysed by SBI economists, only five states budgeted more than 20 per cent growth in expenditure on health and family welfare for the next fiscal.
This indicates that states are more reliant on Central funds for healthcare facilities, in the face of revenue decline.