States stare at financial crunch, here's what it means according to experts

Next year, the revised estimates say that whereas this year it is Rs 6.56 lakh crore transferred to states and next year it is going to be Rs 7.8 lakh crore.

However, this projected growth of 19.5 percent depends on the centre a total tax revenue growth of 12 percent and that is under unlikely because this year's base itself is perhaps overstated at Rs 21.6 lakh crore and which they may not get going by the first 9 months of tax collection.

Therefore, there is likely to be a danger even to the Rs 7.8 lakh crore promised transfer next year.

Economist Haseeb Drabu said: "This is not the first time it has happened, in the pre-FRBM era this was a regular thing. The simplest administrative mechanism is you kind of postpone payments and the axe falls on capital expenditure because you can't stop revenue expenditure. So, typically two things will happen, one, bills will pile up in the treasuries and capex will be cut."

"What you are looking at now in this quarter is a liquidity crisis for the states but what you are staring down in next year is a proper fiscal crisis. So, this is bad time for state finances which have actually seen a good run over the last decade or so."

Yamini Aiyar, president of Centre for Policy Research, said: "We are staring at an unprecedented liquidity crisis which is likely to take us towards a fiscal crisis."

Aiyar added that a significant part of the devolution to states comes in the form of tide schemes -- centrally sponsored schemes which amount to 2 percent of GDP for this year.

"If you look closely at the release of money for these schemes you are looking at releases in the range of about 30 percent for some schemes, 50 percent for others up until December 2019."

"So, this delay of release of money is snowballing into delayed payments at the ground level all the way down to the grass roots of expenditure and that is going to further crisis that we are going confront at the start of the next FY."

Aditi Nayar, principal economist at ICRA, said: "Why the central tax devolution has been cut so sharply between the BE and RE of FY20 is really for two separate reasons. One is that the FY2019 provisional actuals were much lower than FY19 RE. So ever since we saw the FY19 provisional numbers, we have been worried about that."

"Then on top of that once the corporate tax rate was cut, ever since September we have been highlighting that huge part of that is going to be shared with the states and therefore we have got two-fold concern. This will flow into next year as well. We are already worried that the FY20 RE are also overstated and therefore we are going to get a downward adjustment in FY21 as well."

According to Thomas Isaac, finance minister of Kerala: "Normally towards the end of the financial year you would be getting a much bigger support than the normal monthly support from the central transfer. Now, with the shortfall in the revenue the opposite is going to happen."

"For the state of Kerala, we are expecting that our central tax share would decline at least by Rs 20,00 crore which is a big shortfall."

All states are going to face this shortfall and this is primarily because of the large concessions given to the corporate tax, he said.

In fact no corporates were asking for tax concession, he added. "So I do not know for what reason this corporate tax cut was announced in this hurry."