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RBI: State spending at previous year’s level despite pandemic

Despite receiving only one-eighth of their budgeted revenues and sharp fall in central grants amidst the fight against the COVID-19 pandemic, Karnataka and a few States maintained their spending at previous years’ level during the first quarter and later in this financial year (2020-21), according to the Reserve Bank of India (RBI).

The RBI’s report on annual State finances said the Karnataka government has maintained its expenditure level this year largely by implementing policy measures such as freezing dearness allowances (DA) and suspension of encashment facility of earned leave of government employees. Karnataka has also rationalised travel, vehicle and other expenses.

While States such as Andhra Pradesh, Assam, Mizoram, Odisha, and Telangana deferred payment of part or full salary, wages and bills, Maharashtra cut the salary of its employees. Kerala and Tamil Nadu too suspended encashment facilities of earned leave for its staff.

Karnataka and other States have been able to maintain previous years’ expenditure also owing to borrowings in the form of State development loans (SDLs) through the RBI. Karnataka raised ₹34,000 crore SDLs this fiscal year as on October 29, 2020, to bridge the revenue gap due to disruption in economic activity by COVID-19.

Large deficits

The RBI said on the whole, States’ fiscal response to COVID-19 would reflect in a larger increase in revenue expenditure in 2020-21 than budgeted. “These spending coupled with revenue receipts shortfall are likely to convert revenue surpluses as budgeted in 2020-21 into large deficits,” it said.

Before COVID-19, Karnataka’s gross fiscal deficit to gross state domestic product (GSDP) was 2.6% while primary deficit to GSDP was 1.3%. Karnataka and other States’ fiscal deficit in 2020-21 is expected to breach 4% of the GSDP target owing to slowdown in revenue and excessive borrowings, RBI said.

Act amended

Karnataka amended the Fiscal Responsibility Act, 2002, and raised its borrowing limit from 3% to 5% of the GSDP. The State’s total borrowing is expected to cross ₹85,000 crore in 2020-21.

The finances of States have taken a body blow in the first half of 2020-21. “The pandemic may alter budget estimates significantly, eroding the gains of consolidation secured in the preceding three years,” notes RBI. The associated increase in indebtedness was coupled with persisting losses of power distribution companies (DISCOMs) and rising government guarantees for borrowing loans, it said.

The RBI said when the pandemic broke out, the country had comfortable food stock, which further increased to 629.99 lakh tonne by end of September. The enhancement in area under wheat cultivation during the rabi sowing season by 7.3% in Karnataka, Bihar, Gujarat, Jharkhand, Maharashtra, Rajasthan, and West Bengal, helped replenish food stock, it said.

Impact on federalism

The report also noted the pandemic’s impact on governance. “The pandemic has changed the landscape of sub-national government functioning and finance. It may also leave lasting scars on federalism in India,” it said.

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