COVID19 to erode states’ fiscal consolidation

BE/RBI/60/2020

• A report of RBI released now reveals that the additional outgo to fight the impact of COVID­19 will significantly erode the fiscal consolidation achieved by the State Governments in the past three years.
• In its study of the State budgets of 2020­21, the RBI has remarked on ‘COVID­19 and its Spatial Dimensions in India and said that Gross Fiscal Deficit (FGD) of the States would spring during the current fiscal.  It adds that the States have budgeted their consolidated GFD at 2.8% of GDP in 2020­21, but the COVID -19 pandemic is likely to alter the budget estimates significantly.  It would thus, erode the gains of consolidation secured in the past three years.
• The average GFD for States that presented their budgets before the outbreak of COVID­19 is 2.4% of GSDP, whereas the average for budgets presented post­ lockdown is 4.6%.
• Thus the RBI report states that the credibility at stake keeping in view the quality of spending and the credibility of State budgets will assume critical importance.
• The next few years are going to be challenging for the States. They have played an important role in the frontline of the defence against the pandemic. Now, going forward they  need to remain empowered to provide growth impulses to the Indian Economy and thus pave way for resilience against future pandemic too.
• The report says that sustaining the recovery from the pandemic will reshape State finances which inturn would entail boosting investment in health care systems and other social safety nets in line with the States’ demographic and profiles.
• The report finally adds that the States’ responses by delaying or cutting down expenditures, even wages and salaries also need to be taken into account in the assessment of the pandemic’s effects on State finances.