How GST could help tame Centre-States’ fiscal deficit

Figure may fall below 6% of GDP as States’ revenues rise

One of the unintended benefits of the Goods and Services Tax (GST) could well be that the combined fiscal deficit of the Centre and the States as a percentage of GDP is expected to move below 6 per cent in 2017-18.

This may appear ambitious, given that the figure would be the lowest level since 2007-08, and since the additional outgo on pay revisions and farm loan waivers could throw a spanner in the works.

But if the GST rolls out on the scheduled date of July 1, it could help meet the combined fiscal deficit of the Centre and the States, budgeted at 5.9 per cent of GDP for 2017-18 (3.2 per cent for the Centre, and 2.7-2.8 per cent for the States).

The GST boost

That’s because under the GST, the Centre will compensate States for the revenue loss over the next five years, which could boost the States’ aggregate revenue.

The shift from a production-based tax system to a consumption-based tax will benefit populous States such as Uttar Pradesh and Bihar, which are running fiscal deficits of 3 per cent-plus of their respective GDPs. A higher population increases the GST tax base. In contrast, industrialised States such as Gujarat, Tamil Nadu and Haryana could lose out, according to a recent Standard Chartered report on State finances.

Net-net, States that lose revenues will be compensated, while others will benefit directly from the GST. This could push up States’ revenues at the aggregate level. Over the medium to long term, the combined gross fiscal deficit will come down by 0.7-1.2 per cent of GDP owing to the GST introduction, notes a recent RBI report on State finances.

Wobbly State finances, which have worsened over the years, remain a worry. States’ fiscal deficit as a percentage of GDP has deteriorated from an average 2.2 per cent during the UPA-II regime to 2.7 per cent currently. While that is still below the prescribed FRBM limit of 3 per cent, the worry is that some States are given to fiscal profligacy.

Farm loan waiver

For instance, a farm loan waiver, of the sorts announced by the UP government and now picked up by Maharashtra and Tamil Nadu in various forms, could increase the fiscal deficit by about 0.25 per cent of GDP, reckons the StanChart report. In all, such a waiver could see State finances fall by about ₹40,000 crore.

There is additionally the impact of pay revisions arising from implementation of the Seventh Pay Commission recommendations. While Gujarat and Haryana have accepted it, Madhya Pradesh has incorporated it in its 2017-18 Budget. While it is unlikely that these pay revisions will impact the finances of most States in 2017-18, they could prove a ticking time-bomb for 2018-19 and 2019-20. With the pay revisions expected to be made with retrospect effect, it needs to be seen to what extent it impacts the State finances.

(While calculating the fiscal deficit, the interest payments made from issuance of UDAY bonds were excluded.)

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