The article gives the overview of the impact of second Covid wave on the fiscal health of the States.

Impact of first Covid wave on fiscal health of states

• The analysis of the fiscal data for all states with the exception of Goa, Manipur, Meghalaya and Sikkim reveal a grim picture.
• The aggregate revenue deficit for 24 state governments soared to Rs 4 trillion as per the revised estimates (RE) for 2020-21, up from a modest budgeted amount of Rs 353 billion.
• And, despite a 16 per cent cut in capital spending, the fiscal deficit of these states deteriorated to Rs 8.7 trillion in 2020-21 (RE), up from the budgeted estimate of Rs 6.0 trillion.

How states had projected ambitious decline in revenue deficit

• The budgets for the ongoing fiscal year,  had projected an ambitious, decline in the aggregate revenue deficit to Rs 1.2 trillion, lower than the pre-Covid-19 level of Rs 1.3 trillion in 2019-20.
• This has benefitted from the considerable expansion in their revenue receipts this year, forecasted at 24.7 per cent, compared to a moderate 12.4 per cent increase in their aggregate revenue expenditure.
• This anticipated shrinking of the revenue deficit has allowed states to plan for a substantial expansion in their capital expenditure and net lending pegged at 34.1 per cent.
• This anticipated shrinking also allowed the States to attempt a modest correction in their budgeted fiscal deficit, bringing it down to Rs 7.6 trillion in 2021-22 from Rs 8.7 trillion in 2020-21 (RE).

Fiscal concerns over second Covid wave

• The second wave of Covid-19 infections and its spread to rural areas has fanned fiscal concerns.
•  The curtailed consumption of discretionary items and contact-intensive services will dampen the growth of states’ own tax revenues this year.
• Moreover, lower mobility during the regional lockdowns will constrain tax revenues that states earn on fuels.
• The data for the generation of GST e-way bills confirms that the staggered imposition of the localised lockdowns has had an adverse impact on economic activity since April.
• This will result in a sequential slowdown in GST collections that will be reported in the subsequent two months.
• Nevertheless, the GST collections is likely to nearly double to Rs 1.7 trillion in the first quarter of this year, up from Rs 0.9 trillion over the same period last year, boosted by the record-high collections in April,
• That reflected healthy economic activity in March.

The shortfall and way forward

•  States’ own tax collections is estimated to trail their budget estimates as they were drawn up before the second wave.
• For this year,  state GST collections would be at Rs 6.1 trillion, falling below their projected revenues of Rs 8.7 trillion.
• This indicates a GST compensation requirement of Rs 2.65 trillion — only 38 per cent of which may be met through the expected GST compensation cess collections.
• Following the meeting of the GST Council, the Finance Minister has indicated that a back-to-back loan of Rs 1.58 trillion will be provided to the states.
• If the tranches of this loan start flowing to the states soon, it will alleviate their anticipated revenue crunch over the next two months.
• Already, there has been a sharp rise in the size of the upcoming State Development Loan auction to Rs. 19,550 crore, relative to the modest average size of around Rs. 7,400 crore seen so far in the first eight auctions held in FY2022.

Conclusion

In any case, the capital spending budgeted by certain state governments this year appears to be optimistic. Moreover, localised restrictions imposed during the last two months are expected to have constrained activity.

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