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As the 15th Finance Commission grants taper, 11 states budgeted a revenue deficit for FY24, constraining their capital outlay, according to a report by the PRS legislative research released on Thursday.
The budgeting of revenue deficit implies that these states will require borrowings to meet their revenue expenditure on items like salaries, subsidies, and pensions.
These states include Andhra Pradesh, Himachal Pradesh, Kerala, Punjab, West Bengal, Assam, and Uttrakhand, among others.
The report titled ‘State of State Finances’ notes the finance commission grants are awarded to address any revenue needs of the states which may remain after accounting for devolution of central taxes, as on an aggregate states have observed a revenue deficit since FY17.
The 15th Finance Commission has recommended revenue deficit grants worth Rs 2.95 trillion for 17 states between FY22 to FY26, of which 87 per cent grants were awarded in the first three years.
“As the grants will be substantially lower in the next two years, states would have to augment their own sources of revenue or cut down on expenditure to maintain revenue balance,” the report notes.
It said the goods and services tax (GST) compensation for states ended in June 2022, but SGST revenue continues to be lower than both the pre-GST period and the level of guaranteed revenue.
“In order to restore the revenue neutral rate under GST, the 15th Finance Commission had recommended merging tax slabs and minimising exemptions. In the post-compensation period, rationalising GST slabs may bring additional revenue,” it noted.
The report noted that states spent 9 per cent of their revenue receipts on subsidies in FY23, of which a major portion went towards providing free/subsidised electricity.
“Discoms, mostly state-owned, have improved their financial parameters from 2019-20 to 2021-22. However, high debt and guarantees extended by states continue to pose risk to state finances.
As of March 2022, discoms have an outstanding debt of roughly 2.5 per cent of national GDP,” it notes.
The decision by the Centre to include off-budget borrowings done by states, while deciding their borrowing limits in March 2022 led to a sharp decrease in such borrowings -- from Rs 66,640 crore for 15 states in 2021-22 to Rs 18,499 crore for 14 states in 2022-23.
