Covid to erode 3 years of fiscal consolidation gains of states: RBI

Mumbai: The additional outgo to combat the impact of COVID-19 will significantly erode the fiscal consolidation achieved by the state governments in the past three years, an RBI report said on Tuesday.

In its study of the state budgets of 2020-21, the RBI report which has dwelled on the theme 'COVID-19 and its Spatial Dimensions in India', said that Gross Fiscal Deficit (GFD) of the states would spiral during the current fiscal.

"States have budgeted their consolidated GFD at 2.8 per cent of GDP in 2020-21; however, the COVID-19 pandemic may alter budget estimates significantly, eroding the gains of consolidation secured in the preceding three years - the average GFD for states that presented their budgets before the outbreak of COVID-19 is 2.4 per cent of GSDP, while the average for budgets presented post-lockdown is 4.6 per cent," the report said.

Observing that the quality of spending and the credibility of state budgets will assume critical importance, it said, "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.

Going forward, they need to remain empowered to provide growth impulses to the Indian economy and build resilience against future pandemics as well.

Sustaining the recovery from the pandemic will reshape state finances, entailing boosting investment in health care systems and other social safety nets in line with the states' demographic and co-morbidity profiles, it added.

"They need to remain empowered with effective strategies to drive through these difficult times. Sub-national fiscal policy has to be judicious and calibrated," the report said. Across states, maintaining overall stability, quality of spending and credibility of budgets may distinguish one state's resilience from another.