Fiscal deficit worry for states
The five states that have presented their financial status till date indicate encouraging news in capex
Much of economic commentary in India tends to focus disproportionately on the Union Budget. With state governments accounting for 57 per cent, at the latest, of total general government expenditure, it is imperative to analyse state Budgets in more detail.
A Business Standard analysis of five recently presented ones — West Bengal, Bihar, Odisha, Jammu & Kashmir and Assam — for 2017-18, throws up four interesting trends, assuming these are representative.
First, capital expenditure by states is likely to continue to grow robustly in FY18. Most have budgeted for a rise in the share of capex in total spending.
Second, most states expect transfers from the central government to grow at a slower pace in FY18. This includes their share in central taxes and in grants.
Third, most states overestimated their own tax growth in FY17, resulting in a shortfall in revenue receipts. While this has prompted some to make more realistic revenue growth assumptions for FY18, others continue to be optimistic.
Fourth, the combination of own revenue falling short of expectation and higher expenditure led to the fiscal deficit overshooting the budgeted target in most. Some of them expect to bring down the deficit to more manageable levels in FY18.
This is a preliminary analysis. The national picture will emerge once all state governments present their Budgets.
Let’s first look at capital expenditure. In Bengal, Finance Minister Amit Mitra has budgeted for capex to grow 43.9 per cent in FY18, rising to ~39,652 crore, up from ~27,553 crore in FY17 (Revised Estimates or RE). As a percentage of total spending, it is projected to rise to 21.8 per cent, up from 16 per cent in FY16. A similar rise is expected in Odisha, J&K and Bihar. All states have projected revenue expenditure to grow at a slower pace than in FY17.
In Assam, though, capex growth is likely to be muted in FY18. After growing by a staggering 252 per cent in FY17 against a Budget Estimate of 221 per cent, it is projected to grow by 1.5 per cent, accounting for 20.5 per cent of total expenditure.
At a time when a turnaround in private sector investment seems unlikely in the short term, this could provide a needed boost.
On transfers from the central government, with the exception of Assam, the other states expect their share in central taxes and duties to grow at a slower pace in FY18. This is also reflected in the Union Budget. States’ share in central taxes is budgeted to grow 10.9 per cent in FY18, down from 20.1 per cent in FY17.
While part of this could be attributed to the slower projected growth of gross tax revenue, 12.2 per cent in FY18, from 17 per cent in FY17, the higher slippage in states’ share is likely to ebb due to an increase in cesses and surcharges levied by the Centre. Revenue from these sources is not shared with states.
States have also budgeted for grants-in-aid from the Centre to grow at a slower pace in FY18. This is in line with the trend in the Union Budget, where transfers to states under centrally sponsored schemes, Finance Commission grants and other transfers are projected to grow 7.4 per cent in FY18, down from 16.5 per cent in FY17.
On own tax collection, with the exception of Odisha, all states registered lower growth than what was budgeted in FY17. Odisha, Assam and Bihar also saw large slippage in nontax revenue growth.
While Bengal and J&K have kept tax growth projections for FY18 in line with those in FY17, Odisha and Bihar have budgeted for sharp increases.
The worry is that given these optimistic revenue projections and with transfers from the Centre growing at a slower pace, any slippage on states’ own tax revenue is likely to lead to either cuts in spending or an exploding fiscal deficit. And, as much of government spending is sticky in nature, it is spent on interest payments, subsidies, salaried and pensions, the axe could fall on capex.
On fiscal deficits, there is reason to be worried. With the exception of Odisha, states saw major slippage in FY17. Bihar’s went up from a budgeted 2.87 per cent to 4.16 per cent in the RE. For West Bengal the figures were 1.96 per cent and 2.56 per cent. A similar trend is observed in both Assam and J&K.
In some, the slippages are in part a consequence of revenue receipts being lower than projected. In most, total expenditure grew at a faster pace than what was budgeted. Odisha was the exception, with a fiscal deficit at 3.2 per cent (RE) against the budgeted 3.8 per cent.
All these states, with the exception of J&K, have budgeted to bring down the deficit to almost exactly the same level as the estimate last year. Going by the past, there is reason to be concerned. A higher fiscal deficit would lead to increase in market borrowings, putting pressure on bond yields.