Launch of goods and services tax from July 1 along with other adverse macroeconomic reasons has hit their revenues
As they stare at cash flow issues with dropping revenues due to introduction of goods and services tax (GST) from July and other macro factors, many states have proposed to the GST Council to raise their borrowings limit and reconsider the postponement of date of devolution of funds to them by the central government.
States have submitted a proposal to the Council to take “certain measures” to help them tide over cash crunch issues that have arisen due to GST.
“We have proposed certain measures (to deal with the problem of slipping state revenues). The Council is considering them,” Thomas Isaac, finance minister, Kerala, told DNA Money.
Elaborating, he said, “The first proposal is that the Centre must reconsider postponement of the date of Centre’s devolution from the first week of a month to the second or third week of a month. The second (proposal) is that states must be allowed to borrow more instead of putting a cap on the borrowing limit”.
In the wake of the launch of GST, some states have reportedly recorded a drop their revenue collection, besides the general downward trend in economic growth.
In addition to this, indirect taxpayers are experiencing technical glitches in filing returns and uploading invoices on the website of GST Network (GSTN), a firm set up operate and manage IT infrastructure of the new unified indirect levy. This will delay revenues coming from the Integrated GST to the states.
The five-member ministerial panel – of which Isaac is a member – that been formed to look into what was causing the technical snags on the GST site has said the issue would be resolved by October. This is expected to further squeeze the states’ already eroded funds.
Public works and spending of some states like Telangana have also been reportedly hit by a delay in the devolution of funds by the Centre. Some of them are also reportedly being forced to delay payments of salaries and pensions due to scarce resources at the disposal.
There have also been reports of Punjab and Karnataka witnessing shortfall of about Rs 800 crore and Rs 600 crore, respectively, in July’s SGST collection.
In such a situation, can the central government raise the borrowings ceiling of states?
D K Srivastava, chief policy advisor, EY India, said the government should look at “expansionary fiscal support to pull the economy up to get it closer to the potential GDP growth”.
He recommended lifting of debt cap by 0.25% of the gross state domestic product (GSDP).
“State being allowed additional 0.25% of GSDP borrowing may not be a bad idea in the sense that the system has a lot of available saving and there are hardly any takers,” he said.
A state’s borrowing is capped at 3% of the GSDP but, under certain circumstances, 14th Finance Commission has allowed additional borrowing up to a maximum of 50 basis points or half a percentage point for states that qualify for it.
On borrowings by states, the Constitution of India says, “A State may not without the consent of the Government of India raise any loan if there is still outstanding any part of a loan which has been made to the State by the Government of India or by its predecessor Government, or in respect of which a guarantee has been given by the Government of India or by its predecessor Government.”
EY’s Srivastava said since states have been assured 14% growth on their GSDP over their income of FY16 and compensation of losses under GST regime, revenues shortage due to the new tax may just be cash flow problem.
“On non-GST revenue also there has been adverse impact because the macro economy is doing rather adversely, nominal GDP growth has gone down. As a result, even the non-GST revenues have been adversely affected for states. So they (states) are facing certain constraints and we do need some kind of expansionary fiscal support to pull the economy up in terms of getting closer to our potential GDP growth,” said EY’s economist.
...& ANALYSIS
- Public spending of Telangana has been reportedly hit by delay in devolution of funds by the Centre
- Some states are reportedly being forced to delay salaries and pensions due to scarce resources
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