The revenue loss from gasoline tax cuts expected to be lower.

According to estimates by ratings firm ICRA NSE 0.24 percent, states will lose around Rs 44,000 crore in revenue as a result of the Centre’s reduction in value-added tax on gasoline and diesel, as well as a reduction in excise duty, but gains from the more-than-budgeted tax devolution will be relatively higher at Rs 60,000 crore.

It did, however, warn against the budgetary risk posed by an increase in state government guarantees to state-level enterprises, citing the minimal contributions made by numerous states to their guarantee redemption funds.

In an effort to provide respite to consumers from rising crude oil prices, the central government reduced the road and infrastructure cess (RIC) component of the Central excise duty levied on petrol and diesel by Rs 5 and Rs 10, respectively, effective November 4. Although the RIC component is not shared with states, because states impose VAT on an ad-valorem basis, ICRA estimates that the excise cut will reduce their VAT inflows by Rs 9,000 crore.

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“We predict a Rs 350 billion revenue loss to all states and UTs as a result of the VAT cuts on these fuels” (Rs 35,000 crore). As a result, their total income foregone for FY2022 is estimated to be Rs 440 billion (Rs 44,000 crore), in line with the predicted revenue loss of the GoI (Government of India),” said Aditi Nayar, chief economist at ICRA, during a webinar on Thursday.

The fiscal loss or money foregone, according to Nayar, is justified given the benefits in terms of lowering inflation and raising overall confidence levels among households and other economic players.

Benefits of Tax Devolution

Central tax devolution, on the other hand, is expected to exceed the government’s FY22 budget expectations of Rs 6.7 lakh crore by Rs 60,000 crore, and the FY21 provisional actuals by Rs 1.3 lakh crore, according to the ratings company.

Despite this, tax devolution to states remained practically unchanged in the first half of FY21 and FY22, at Rs 2.6 lakh crore. In the July-September quarter of this year, the devolution amount increased to Rs 47,500 crore each month, up from Rs 39,200 crore per month in the preceding three months.

“Based on the expected upward revision in tax devolution to Rs 7.3 trillion (Rs 7.3 lakh crore) in FY22, keeping the monthly amount of tax devolution at Rs 475 billion in October-February FY2022 will back-end the release of Rs 2.3 trillion to March 2022, which will be inefficient from the cash-flow perspective for the states,” Nayar said, arguing that the government should increase monthly devolution to states to avoid back-ended transfers.

“The income visibility will boost confidence and allow them to accelerate spending, particularly growth-friendly capital spending,” she added.

In FY22, ICRA estimates that most states would have a budget deficit of around 3.5 percent of GDP, which will be sustainable, and only a few states will need to borrow more than 10% of GDP. In addition to the carried over borrowings from last year, they will have access to the Centre’s back-to-back loans totaling over Rs 1.59 lakh crore for GST compensation, which will provide them with additional funding.

“Only a few states are likely to face financing constraints beyond the current year’s sources,” Nayar added.

State development loans have been issued at a 15% lower rate than last year, she noted, with only five states borrowing more than they did in the same time of FY21.

Guarantees at the state level

States provide state-level bodies with guarantees that allow them to borrow money from a variety of sources. The guarantee ceiling is set by each state. States have the ability to set and amend their guarantee ceilings, unlike the yearly borrowing limit for debt, which is determined by the Government of India. This enables them to offer new guarantees in a short amount of time without the need for government approval or considerable scrutiny from the Reserve Bank of India.

Some governments had already provided significant guarantees before the epidemic began, according to ICRA, and the stock of guarantees in a few states is believed to have risen considerably since then.

“Without proper data, it’s unclear how much of the recent increase in guarantees is due to non-revenue-generating projects that would eventually be serviced by the respective governments, making them an actual obligation rather than a contingent liability.” This is a financial concern, especially given the small contributions made by numerous governments to their guarantee redemption accounts,” Nayar said.