Capex of Centre, states may have slowed in Sept quarter

Capital expenditure by the Centre and states is likely to have slowed down considerably in the second quarter of the current financial year, reflecting the dim investment climate. This is partly due to pressure on governments to maintain their budgeted fiscal deficit in view of the slow indirect tax collections growth after the goods and services tax (GST) roll-out.

An analysis by ICRA of the expenditure patterns of 12 large states reveals the combined capital outlay of these states has contracted by 23.6 per cent in Q2FY18, after contracting 14.3 per cent in the earlier quarter. The situation becomes grimmer if the slowdown in the Centre’s capex is taken into account.

Data released earlier by the Controller General of Accounts (CGA) shows capital expenditure by the Centre had contracted 9.2 per cent in Q2, after growing 39.5 per cent in the first quarter. Excluding loans, capital outlay grew 13.9 per cent in Q2, from 105.5 per cent in the previous quarter.

If the expenditure pattern of the 12 states is representative of the remaining states, and the Centre’s numbers are added, the data suggests general (Centre and states) government capital expenditure might have slowed in the second quarter of FY18. With private investment cycle showing no signs of a turnaround, sluggish general government capex might further depress capital formation. Gross fixed capital formation, which shows investment activity, had grown only 1.6 per cent in Q1FY18, after contracting 2.1 per cent in Q4FY17. The Central Statistics Office (CSO) will release the second quarter gross domestic product estimates on Thursday.

Capex slowdown could be due to farm loan waivers, a power distribution companies’ restructuring scheme and delays on account of Assembly elections (in Punjab and Uttar Pradesh). But slowdown in revenue receipts of the Centre and states is worrying. “As feared, the pick-up in revenue spending amid a slowdown in the growth of revenue receipts has contributed to a worsening in the contraction of the combined capital outlay of the 12 states,” says ICRA.

Revenue receipts of these states grew 14.3 per cent in Q2FY18 (when the goods and services tax was rolled out), from 18.8 per cent in the previous quarter. But their tax revenue growth has nearly halved — 11.6 per cent in Q2 from 20.8 per cent earlier. Further, their own tax revenue has grown only 8.1 per cent in Q2.

Data from the CGA showed the government has collected ~1 lakh crore through integrated goods and services tax (IGST). After refunds, the balance will be split between the Centre and states. But this, ICRA says, is yet to happen. “This, in addition to a possible timing mismatch in the release of GST compensation cess to states, could have partly contributed to the sharp sequential easing in the SOTR (states own tax revenues) growth of the states in the sample in Q2 FY18,” it adds.

On the Centre’s revenue side, corporate tax revenues have grown in line with Budget projections. But collections from personal income taxes have dipped. Revenue from income tax collections grew 16.4 per cent in the first half of FY18 against a budgeted growth of 26.2 per cent. On the indirect tax front, overall revenues grew 18.6 per cent in the first half of FY18 against Budget expectation of 7.6 per cent. This is likely to be an overestimation as it includes collections from IGST, a part of which will have to be distributed among states.

“Netting off 50 per cent of the IGST collections in August-September 2017 would bring down the growth in indirect tax revenues to a subdued 4.4 per cent in H1 FY2018,” says ICRA.

“The growth in the GoI’s tax revenues is being overstated to some extent by the inclusion of IGST, yet-to-bereleased refunds, as well as the GST compensation cess. There remains a fair bit of uncertainty regarding the actual revenue buoyancy of the GoI’s indirect tax collections after GST.”