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A study of fiscal parameters of states by the Reserve Bank of India (RBI) identified Bihar, Kerala, Punjab, Rajasthan and West Bengal as highly stressed due to their high debt levels, the quality of expenditure and the level of fiscal deficit. These states could face a crisis if they fail to curb non-merit expenditure, the study has warned.

High debt also implies that a state spends a significant share of its revenues on servicing the debt. Several states spend about 10 percent or more of revenue receipts on interest payments, with Punjab and West Bengal spending more than 20 percent.

The study, published in the June edition of the central bank’s monthly bulletin, identified another five states as fiscally vulnerable due to their high debt levels. These are Andhra Pradesh, Haryana, Jharkhand, Madhya Pradesh and Uttar Pradesh. The study group was guided by deputy governor Michael Patra.

Of the 10 stressed states, Punjab seems to be in the most perilous situation, an outcome of years of freebies such as free power to farmers handed out by successive governments. Among all states, Maharashtra is in the most comfortable situation with its debt to gross state domestic product (GSDP) ratio under 20 percent.

The ratio of debt to GSDP of the five most stressed states is in the high thirties (see chart). The debt to GSDP is an indicator of a state’s ability to repay its debt, and higher ratios mean a high risk of default.

Some of these states breached either one or both the targets for debt and fiscal deficit for 2020-21 set by the 15th Finance Commission due to economic contraction and depressed tax collections.

The study also noted that the share of revenue expenditure in total expenditure in these states was 80-90 percent, which leaves them with little resources for capital expenditure or asset creation.

Low capital expenditure hurts in the medium to long term, as the state will continue to experience slow revenue growth and remain deep in debt. States such as Rajasthan, Kerala, Punjab and Kerala spend 90 percent of their revenue expenditure on paying salaries, pensions and interest on loans.

So how stressed are the five states identified by the RBI? We take a look at their key fiscal indicators.

Bihar

The state’s debt to GSDP ratio for 2022-23 was estimated at 38.7 percent, about the same level as the last fiscal year but higher than the 36.7 percent seen in 2020-21, as outstanding debt continues to expand faster than the state’s economy.

Bihar’s economy is expected to expand about 9.7 percent in nominal terms to Rs 7.45 lakh crore this year.

The outstanding debt of about Rs 2.88 lakh crore in the budget estimates for the current year is about 70 percent higher than it was in 2018-19, the year before India’s economy started slowing. The RBI study estimates that the state will lower its debt to GSDP ratio to 31.2 percent by 2026-27.

As a ratio of the state’s revenue receipts for the current year, outstanding debt is about 146 percent. The state borrowed more than it had budgeted for in 2020-21 and 2021-22 due to a shortfall in revenues.

Expenditure continued to climb faster than revenues. The revised estimates for 2021-22 projected a 48 percent rise in revenue expenditure against a 32 percent rise in revenue receipts from the previous fiscal year.

In the current fiscal year, the state has budgeted to spend Rs 2.38 lakh crore, including Rs 14,670 crore for loan repayment. Of the balance, just about 13 percent is proposed for capital outlay. Over 86 percent of the net expenditure would be on the revenue account, which includes salaries, pension and interest.

The state is highly dependent on central transfers — a share in taxes collected by the Centre and grants—to keep its economy running.

The share of taxes collected by the state, referred to as its own taxes, is just a little more than 20 percent of its revenue receipts. These taxes include state goods and services tax, state excise, stamps and registration. The economic slowdown and pandemic affected its tax revenues but increased grants from the Centre helped.

Kerala

The southern state’s debt to GSDP ratio for 2022-23 was estimated at 37.2 percent, almost unchanged from the ratios for the preceding two fiscal years. The state’s debt to GSDP ratio was below 32 percent in 2019-20, when the state suffered a second successive year of flooding due to heavy rainfall.

The ratio climbed sharply to 37 percent in 2020-21 when the economy contracted about 3 percent and the debt stock climbed 14 percent.

The state has projected a 10.8 percent growth in its nominal GDP to almost Rs 10 lakh crore for the current financial year.

The debt stock of the state as per the budget estimates for 2022-23 stood at Rs 3.71 lakh crore, up 58 percent from 2018-19. As a ratio of the revenue receipts for the current year, the outstanding debt is about 277 percent.

The state has projected a narrowing of the difference in the growth rate of its nominal GSDP and debt stock in the revised estimates for 2021-22 and budget estimates for 2022-23.

However, the debt to GSDP ratio is unlikely to see any significant decline anytime soon—the state has projected it to be 35.7 percent in 2024-25 in its medium-term fiscal policy and strategy statement. The RBI study has estimated it will be 38.2 percent in 2026-27.

The state estimates that the share of its own tax revenues in revenue receipts will bounce back to 55 percent in the current year after falling below 50 percent in the last two fiscals.

The share of resources transferred from the Centre is set to decline to 36 percent in the current financial year from over 41 percent following the improvement in revenue generation from the state.

The state expects its revenue expenditure growth to moderate after a spike in the last two years led to some extent by expenditure related to the COVID-19 pandemic.

The rise in expenditure last year was mostly due to pay revision, payment of dearness allowance arrears and deferred salary payments. Yet, 91 percent of the expenditure net of loan repayment will be on the revenue account in the current fiscal year, with a bulk of it spent on salaries, pensions and interest.

West Bengal

The state’s debt to GSDP ratio for 2022-23 was estimated at 34.2 percent, down from about 37.1 percent in 2020-21.  The state has brought down the ratio gradually from 40.7 percent in 2010-11, by slowing the growth of debt stock.

In seven of the last 11 fiscal years, the rise in debt stock was lower than the expansion of the nominal GSDP. The situation reversed in 2019-20 and 2020-21 when the economy slowed. Yet, the debt is very large, with the ratio of debt to revenue receipts for the current year estimated at 296 percent.

The RBI study estimates that the fiscal situation of the state will deteriorate. It expects the debt to GSDP ratio to deteriorate to 37 percent in 2026-27.

The state expects its economy to expand by 11.5 percent to Rs 17.1 lakh crore and its debt to rise 10.9 percent to Rs 5.86 lakh crore in the current fiscal year.

The share of its own tax revenues in total revenues has been fairly steady at 40-42 percent even in the recent slow growth years, while the share of central taxes was been about 30-33 percent. The growth in own tax collections fell marginally in 2019-20 and 2020-21.

The state has budgeted for a slower revenue receipt and expenditure growth for the current year after a sharp pick-up in the last fiscal. The revenue deficit is also expected to narrow.

The share of revenue expenditure in the total expenditure net of loan repayment for the current fiscal year has been budgeted at about 87 percent. More than half the expenditure on the revenue account would be on the payment of salaries, pensions and interest.

Rajasthan

The state’s debt to GSDP ratio for 2022-23 was estimated at 39.8 percent, which was about the same levels in the previous two fiscal years.

Rajasthan’s debt to GSDP ratio shot up in 2020-21 when its total debt stock rose more than 16 percent, while GSDP growth was just a little over 1 percent. The ratio was mostly below 35 percent before the onset of the coronavirus pandemic when growth in debt exceeded GSDP growth by a small margin.

The RBI study does not foresee any improvement in the state’s debt to GSDP ratio and estimates that it would be at current levels in 2026-27.

The state’s nominal GSDP is projected to expand by 11.6 percent to Rs 13.3 lakh crore in 2022-23 and total debt by 12.3 percent to Rs 5.3 lakh crore.

Like Kerala and West Bengal, the state’s debt is very large compared to its revenue receipts. The ratio for the current year is estimated at 247 percent.

The share of own tax revenues in the state’s revenue receipts has been around 40-45 percent in recent years and the share of taxes transferred from the Centre at 23-30 percent. Own tax revenues were estimated to have jumped 37 percent in 2021-22 when economic growth recovered.

The expansion of the economy and growth of own tax revenues as well as revenue receipts are projected to moderate in the current fiscal year due to the base effect.

The pace of expenditure growth is also projected to moderate but the quality of expenditure is unlikely to improve.  Of the total expenditure net of loan repayment, 87 percent would be on the revenue account, half of which are committed expenses such as salaries, pension and interest payment.

Punjab

The newly elected government has estimated that the state’s outstanding debt to GSDP ratio at 45.2 percent for 2022-23, little changed from 45.9 percent in the revised estimates for 2021-22.

The state’s debt to GSDP has been 40 percent or more for six years. The RBI study does not anticipate any improvement in the ratio in the near term and has projected it at 46.8 percent for 2026-27.

Also read: Punjab proposes Rs 1.56-lakh-crore expansionary budget for FY23

The state has revised its estimates of outstanding debt at about Rs 2.63 lakh crore at the end of 2021-22 in the budget presented on June 27.  That apart, state agencies, public enterprises and other state-owned bodies have a debt of Rs 55,000 crore, of which Rs 22,250 crore is guaranteed by the state government.

Over 50 percent of the state’s revenue receipts come as transfers from the Centre, largely in form of grants. The GST Compensation cess was a significant share of the state’s resources and the termination of the cess could set the state back by about Rs 14,000-15,000 crore, the state finance minister said in the budget speech. The share of the state’s own revenues was less than 48 percent.

The RBI study has cautioned that it was among the states the most vulnerable to fiscal shocks arising out of the realisation of contingent liabilities, particularly financial restructuring or bailout of ailing electricity distribution companies.

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Egypt has contracted to buy 180,000 tonnes of wheat from India, Supply Minister Aly Moselhy said on Sunday, less than previously agreed, a deal that is part of the country's efforts to diversify its wheat supplies.

Egypt, one of the world's biggest wheat importers, is looking for alternatives to Black Sea grain exports which face disruptions caused by Russia's invasion of Ukraine.

Russia and Ukraine have been Egypt's main wheat suppliers.

The Ukraine crisis has also raised import costs for Egypt, which heavily subsidises bread for its 70 million population.

Moselhy had said in May that Egypt had agreed to buy 500,000 tonnes of wheat from India but that a contract had not been signed.

India banned wheat exports in May because of lower domestic production, but made allowances for countries like Egypt with food security needs.

"Based on what the supplier said, the condition was that the wheat has to be at the ports, then it would be available," Moselhy said on Sunday.

"We had agreed on 500,000 tonnes, turns out [the supplier]has 180,000 tonnes in the port," he said.

Moselhy added that Egypt was also in talks with Russian suppliers for a wheat purchase agreement.

Egypt is also looking at ways to extract more flour from its grain, Moselhy said, by raising the extraction percentage for flour used for subsidised bread to 87.5% from 82%.

It plans to save around 500,000 tonnes of imported wheat, and to import 5-5.5 million tonnes of wheat for the 2022/23 fiscal year, he added.

Current wheat reserves are sufficient for 5.7 months after the procurement of 3.9 million tonnes in the local harvest, Moselhy said on Sunday.

It has been almost five years since the Goods and Services Tax (GST) was introduced in India and it is now time to review whether one of the country’s most transformational tax reforms since Independence has delivered on its promise and if the economic rationale behind moving to GST is yielding the expected benefits for both the government and business.

The concept of subsuming existing central and state taxes into GST was very novel and the resultant three-tax structure (Integrated GST, Central GST and State GST) instead of a multiplicity of levies, was a significant improvement over the earlier indirect tax regime.

However, this three-tax structure has led to a lack of fungibility of Input Tax Credit (ITCs) for businesses with operations in more than one state. While SGST credits cannot be used for payment of either IGST or CGST even within the same state, there is a specified sequence for using IGST credits for payment of CGST and SGST.

Any of the GST tax credits in one state cannot be used for payment of a similar tax in another state. The three-tax structure of GST with a requirement to register and pay each of the three taxes in every state of operation without fungibility across states, has made it essential for all businesses to maintain separate state-wise records which makes GST complex, more so for mid-sized and small businesses. The attendant complexity makes it necessary for businesses to have more reconciliations, record keeping and automation efforts, which lead to increased costs for businesses.

Equally, the requirement of vendors to pay GST and fulfil their compliance requirements in order to entitle buyers to take the ITC does create an additional workflow requirement for all businesses, both from accounting and tax perspectives. While there was some leeway in the past for taking unmatched credits, it has been completely done away with now, putting businesses that have non-compliant vendors at a disadvantage, despite their own compliances and payments being spotless.

In the present situation where many businesses have been handicapped by working capital shortages due to elongated payment cycles from customers, the above structure imposes significant a funding burden due to:

a)    The inability to adjust ITC across states and in some cases across taxes in a particular state.

b)    The requirement that the vendor is compliant with tax payment and return filing.

The GST Council in its meeting next week is likely to consider a proposal for making changes in the monthly tax payment form -- GSTR-3B, which would include auto-population of outward supplies from sales return and non-editable tax payment table, officials said.

The move would help curb the menace of fake billing, whereby sellers would show higher sales in GSTR-1 to enable purchasers to claim input tax credit (ITC), but report suppressed sales in GSTR-3B to lower GST liability.

Currently, GSTR-3B of a taxpayer includes auto drafted input tax credit (ITC) statements based on inward and outward B2B supplies and also red flags any mismatch between GSTR-1 and 3B.

As per the changes proposed by the Law Committee of the GST Council, there will be auto-population of values from GTSR-1 into GSTR-3B in specific rows to establish one-to-one correspondence to a large extent between rows of the two return forms, thereby providing clarity to the taxpayer and tax officers.

The change would minimize the requirement of user input in GSTR-3B and ease the GSTR-3B filing process, an official said.

The tax payment table in Form GSTR-3B will be auto-populated from other tables in the form and will be non-editable, as per the amended form recommended by the Law Committee of the Council.

Noting that amendment in Form GSTR-3B, as far as feasible, should flow from amendment in Form GSTR-1, with regard to outward liabilities, the Committee suggested that for giving more clarity to the taxpayers, separate amendment table (for liabilities) may be introduced in GSTR-3B, so that any amendment made in Form GSTR-1 gets reflected in GSTR-3B clearly.

Similarly, an amendment table may also be incorporated in GSTR-3B to show any amendment in the ITC portion, the Committee suggested.

Once the changes proposed by the Law Committee gets an in-principle approval of the GST Council, the revamped form will be put in public domain for stakeholder consultation. The GST Council in a meeting later will then approve the final form.

Currently, taxpayers file statements of outward supplies in GSTR-1 by the 11th day of the subsequent month, while taxes are paid by filing GSTR-3B between 20th, 22nd and 24th of every month for different categories of taxpayers.

Commenting on the proposed changes in GSTR-3B, AMRG & Associates Senior Partner Rajat Mohan said tax filings are set to change for e-commerce operators rendering passenger transportation services, accommodation services, housekeeping services, and cloud kitchens. Such e-commerce players would now be made liable to report supplies on behalf of suppliers in their GSTR -1 and GSTR-3B in separate cells.

"E-commerce players like Uber, Swiggy, Zomato and MMT would see few changes in monthly tax filings that will ensure more data points for the government system for big data analytics," Mohan added.

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RBI Deputy Governor Michael Debabrata Patra on Friday exuded confidence that the monetary policy actions will be more moderate than the rest of the world, as inflation is expected to fall below 6 per cent in the January-March quarter of the current fiscal.

The Reserve Bank has already raised the key policy rate by 90 basis points in May and June to 4.9 per cent to tame high inflation, mainly due to supply disruptions on account of the ongoing Russia-Ukraine war.

Speaking at a session on 'Geo-Political Spill-overs and Indian Economy' at PHDCCI here, Patra said there are indications that inflation may be peaking.

"As monetary policy works through into the economy...inflation is expected to fall back into the threshold in the fourth quarter of 2022-23 and fall even further in the next year. This is only the baseline scenario," he said, adding that because of initiatives taken so far, the inflation may fall "sooner and faster".

"Therefore, in this world of global inflation crisis, it is possibly better to look at the change in inflation, not the level," said the Deputy Governor, who looks after the monetary policy department in the RBI.

He is also a member of the Monetary Policy Committee (MPC), which decides the key policy rate (repo).

The government has tasked the RBI to ensure inflation remains at 4 per cent with a two per cent deviation on either side.

While the retail inflation based on Consumer Price Index (CPI) moderated to 7.04 per cent in May from 7.8 per cent in April, it remained above the RBI's threshold of 6 per cent for the fifth month in a row.

"Against this backdrop, it is our hope that required monetary policy actions in India will be more moderate than elsewhere in the world and that we will be able to bring inflation back to target within a two-year time span. If the monsoon brings with it a more benign outlook on food prices, India would have tamed the inflation crisis even earlier," he said.

Observing that the decline in inflation will be very "grudging", Patra said India will "succeed in bending down the future trajectory of inflation and thereby it will win the war".

Earlier this month, the Reserve Bank in its bi-monthly monetary policy review raised the benchmark repo rate -- at which it lends short-term money to banks -- by a sharp 0.50 per cent to 4.90 per cent to rein in spiralling prices. It followed an off-cycle meeting on May 4, when the central bank hiked the repo rate by 0.40 per cent.

The RBI had also raised the inflation projection to 6.7 per cent for the current fiscal year from its earlier forecast of 5.7 per cent.

The next meeting of the MPC is scheduled to take place during August 2-4, 2022.

Senior Congress leader P Chidambaram on Friday criticised the government over the state of the Indian economy, asking if it was in the "pink of health" after high fiscal deficit, inflation, and the depreciating value of the Rupee. He also questioned the government for "backsliding on the fiscal deficit target for the current year.

"Within months of setting the FD target at 6.4 per cent for 2022-23, government is backsliding. Now, Government is saying it will 'try to keep the FD at 6.7 per cent', same as the level in 2021-22," the former finance minister said on Twitter.

"High FD, high inflation, huge FPI outflows, depreciating rupee, depletion of forex reserves -- what do they point to? Is the Indian economy in the pink of health," he questioned.

The Congress party and its leaders have been questioning the government's economic policies and accusing the BJP dispensation of "mismanaging" the country's economy.

The finance ministry's Department of Expenditure has argued against extending the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) beyond September or announcing any significant tax cuts, warning of the consequences for the Centre's fiscal position, a news report said.

The government in March extended the PMGKAY, the free food ration scheme rolled out during the Covid-led lockdown, for six months till September. The Centre has allocated Rs 2.07 trillion for food subsidies in the current fiscal year, while the extension of PMGKAY till September is expected to increase the subsidy bill to nearly Rs 2.87 trillion, The Economic Times reported.

If the government decides to extend the scheme further, it would cost the Centre another Rs 80,000 crore for another six months, swelling the food subsidy amount for FY23 to Rs 3.7 trillion.

Also Read: 'One Nation, One Ration Card' programme implemented across India

More tax cuts or food subsidy extensions would adversely hit the fiscal math, the union finance ministry's Department of Expenditure said in an internal note. The department said, "In particular, it is not advisable to continue the PMGKAY beyond its present extension, both on the grounds of food security and on fiscal grounds," quoted ET.

The Centre's recent decisions to extend free ration, hike fertiliser subsidy, reintroduce cooking gas subsidy, excise duty cut on petrol, diesel and cut in customs duty on edible oils have created a serious fiscal situation, the department said.

The Centre's move last month to cut excise duty on fuel to soften the blow of inflation will cause a revenue loss of about Rs 1 trillion, the note said.

To curb inflation, the Centre last month announced a reduction of excise duties on petrol and diesel by Rs 8 and Rs 6, respectively. At the same time, it also announced a subsidy of Rs 200 per domestic LPG cylinder for up to 12 cylinders in a year.

For FY23, the government has budgeted a fiscal deficit of 6.4 per cent of GDP, while Fitch Ratings expect it to be 6.8 per cent due to higher subsidies and revenue loss due to duty cuts.