Annual Report on State Finances: The vital third tier

News: Reserve Bank of India (RBI) has released its annual study of state finances.

What are the findings of the report?

-States’ gross fiscal deficit breached the 3% of gross domestic product (GDP) mark.

-Combined revenue deficit of the state governments rose from 0.1% of GDP in 2018-19 to 2% of GDP in 2020-21 because of the pandemic. This was in spite of a sharp squeeze in expenditure during the pandemic, especially on services, development, and welfare.

-It talks about the concerns raised by state governments about their fiscal position and disagreements about goods and services tax compensation in the light of this severe fiscal stress on state capitals.

-The report demands a special focus is on local body finances, and particularly urban local bodies and municipal corporations.

What does the RBI report say about local bodies?

The reports surveyed 141 municipal corporations and analyzed the budgets of the 20 largest ones. It was found that almost a quarter of municipalities have their revenue shrank by more than half. The RBI estimates that about a third of municipal corporations are “severely fiscally stressed.

This all will have a major impact on the development and welfare activities performed by the local bodies. The report demonstrates that the more fiscally stressed an urban area is, the worse it is performing in terms of the vaccination rollout.

What should be the way forward?

State-issued grants: Transfers from the upper tiers of government should be quicker and easier to access.

Institutional reforms: The municipal bond market should be a major focus for future financial sector reform.

Source: This post is based on the article “The vital third tier” published in the Business Standard on 2nd December 2021.