The COVID-19 pandemic has wreaked havoc not only on central government finances, but on state government finances as well. With economic activity slowing down sharply, the consequent fall in their own revenues, as well as transfers from the Centre, has led to states not only curtailing their expenditure, but also having to borrow more to finance their spending. As a consequence, the average fiscal deficit of 13 states has risen to 4.5 per cent of gross state domestic product (GSDP) in the revised estimates for 2020-21, up from the budgeted estimate of 2.8 per cent according to a report from SBI. Next year, in line with the fiscal consolidation path adopted by the Centre, states too have projected to bring down their deficits to 3.3 per cent of GSDP.

The extent of the revenue hit that these states have faced in the current financial year is staggering. As against a budgeted goods and services tax (GST) target of Rs 5.86 lakh crore in 2020-21, collections have fallen by 21.2 per cent to Rs 4.62 lakh crore. In states like Kerala and Uttar Pradesh, the report shows, revenue loss is in excess of 30 per cent. A similar decline is observed in state VAT (value added tax) and sales tax collections. While this is mainly levied on crude oil products, and thus collections should have benefited due to an increase in taxes levied, the decline in demand has been far greater. Collections for these 13 states through this route have fallen by 14.7 per cent from budgeted expectations of Rs 2.62 lakh crore to Rs 2.23 lakh crore in 2020-21.

As a consequence, states have had to curtail their spending. But several states, including Bihar, Chhattisgarh, Karnataka, Odisha and West Bengal, have spent more than what they had budgeted for on health and family welfare during this year. For the next year, too, most of these states have projected sharp increases in spending in these areas. Considering that healthcare is primarily the domain of the states, this increase in spending during a health emergency was much needed. It is disappointing that in several states, spending on health has actually fallen during this period. Equally disconcerting is the sharp cut backs on capital expenditure by states during this year. At a time when private consumption and investment demand are subdued, higher government spending, both at the central and state level, is needed to offset the decline. Given the extent of the economic distress, especially in the informal parts of the economy, far greater policy support is needed.