The concerns about rising fiscal deficit of states, more so in the wake of farm loan waivers announced by some, may have been a tad exaggerated as the deficit in most years has been below the budgeted target, according to a report by Credit Suisse. States’ combined fiscal deficit (excluding UDAY bonds) has been budgeted at 2.5% of their GDP for the current fiscal, against 2.7% (RE) in 2016-17, it said. Farm loan waivers likely adding just another 20 basis points to the deficit in 2017-18, considering that the entire waiver process takes a few years to complete, so impact is staggered.
However, the REs of some major states like Uttar Pradesh -— which presented the 2017-18 budget on Tuesday — were not available as the Credit Suisse report was prepared.
“In fact, aggregate government “crowding out” could be among the lowest in many years i.e., the governments are budgeted to appropriate a smaller share of incremental deposits than in the past. This should help bring down the cost of capital,” said the report.
States will spend 87% more than the centre this fiscal (against just 6% in 2010-11), accounting for 65% of the total government expenditure. However, the annual growth in their spending is expected to touch only 9% in 2017-18, the lowest in over a decade. Growth in spending by states will be just 14% of incremental GDP in FY18, against 24-39% in FY15-17. With the centre going on the path of consolidation, the slowdown in spending by states, however, is “negative for economic growth”.
After two straight years of drought, focus is back on irrigation facilities for agriculture. States will together spend Rs1 lakh crore on irrigation capex in the current fiscal, which is 3.3% of total expenditure and 22% of total capex. Such spending has risen at an impressive compounded annual growth rate of 20% since FY15.
Similarly, nearly a third of states’ aggregate revenue expenditure is on education and social welfare. The revenue expenditure on education of all states now adds up to Rs4.9 lakh crore, or 2.9% of GDP, rising sharply over the past decade from just over 2.0% of GDP, with such spending having risen at a 17% CAGR.
States’ own taxes as a % of GDP have grown from 5.9% in FY11 to a budgeted 6.5% in FY18, although the share of non-tax revenues has also fallen. As the GST Council takes over tax setting for more than 35% of states’ own tax revenues, it may push states to be more creative and work harder for revenue generation, such as PPP for roads or urban development, external funding for metro rail, or land sales, according to the report.
Although capex is slowing in recent years (from over 19% of total spending by states two years ago to a budgeted 17% in this fiscal), higher revenue expenditure is not all bad per se, as it helps smaller-then-normal state governments (States like Kerala have shown more than average growth in per capita output).
The report says the centre-state GST split at a 50:50 ratio is skewed in favour of the centre (ideally it should have been 45:50, based on their share of taxes that will be subsumed), so compensation to states is not quite a big deal. However, a 14% annual growth (for compensation) favours states because many of them have budgeted lower tax revenue growth for the current fiscal.