Power sector and local body reforms key to avoiding revenue shortfall in states: SBI Ecowrap

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The economic research department of State Bank of India (SBI) in its report on July 9 said Indian states face a potential revenue shortfall in FY22 budget estimates. However, the shortfall could be prevented if they implement reforms in the power sector and local bodies as recommended by the 15th Finance Commission for 2021-26.

“Indian states face a potential revenue shortfall of around Rs 1.05 lakh crore in FY22 budget estimates. However, if the states could carry out the reforms in power sector and the local bodies, a potential amount of Rs 1.77 lakh crores could still be available to them,” SBI Ecowrap stated.

As per the Ecowrap, GST collections are estimated at Rs 7.59 lakh crore for 2021-22 as against the budget estimate of Rs 7.98 lakh crore.  This hints at a shortfall of Rs 40,000 crore. Considering the current consumption trends of oil and petroleum products, states could see a shortfall of Rs 53,000 crore to Rs 65,000 crore in 2021-22 from oil excise.

But states can avoid this revenue shortfall and possibly add a potential Rs 1.77 lakh crore to their revenues, if they implement the reforms in the power sector and local bodies on the recommendation of the 15th Finance Commission.

“This implies that Indian states could still end FY22 with an additional Rs 72,000 crore in their kitty. Thus, fiscal position of Indian states is still much better than the overall consensus. Also, the recently released overall tax collection numbers have provided much cheer for the Centre.

In May 2020, as part of the Aatmanirbhar Bharat package, the Centre had permitted the states to borrow an additional 0.5% of the GSDP from the RBI on fulfillment of reforms in the power sector. But, only 13 states implemented the reforms last year. Once again, the same offer has been reinititated by the Centre wherein states can borrow additional Rs 1.1 lakh crore from the RBI.

The Centre has accepted the 15th finance commission recommendations to increase the share of grants in total transfers to states to 19.65% from 11.97% by the 14th finance commission. But certain pre-conditions must be met by the local bodies in states to avail the grants.

“One of the major conditions is having both provisional and audited accounts online in the public domain by the local bodies. Apart from these entry level conditions, there are certain other conditions related to the usage which are prescribed by FC,” report stated. If these conditions are met by the local bodies, states could borrow an additional Rs 67,105 crore.

In the same way, the commission asked states to agree to take over the future losses of state power distribution companies in a classified manner. States were recommended to install 250 million smart meters, 10,000 feeders, and 400,000 km of low-tension power transmission lines as part of the power sector reforms.