While the Centre reported a slippage from its fiscal deficit target in FY18, there are early indications that the state governments’ combined fiscal deficit in FY18 could be more than the estimated (BE) 2.69% of the GDP; it might even cross the 3% threshold, prescribed under their Fiscal Responsibility and Budget Management (FRBM) Acts and mandated by the 14th Finance Commission. The potential slippage is despite the burden — and the extra fiscal flexibility allowed — under the UDAY scheme for the power sector having petered out. The prospect for FY19 is not bright either as at least six states are implementing farm loan waivers and most are to factor in Pay Commission-induced salary increases for their staff. An NIPFP paper released in December had said, “states in aggregate are expected to revert to below 3% target of deficit in FY18,” but as seven states have released their FY19 budgets recently, two — West Bengal and Rajasthan — have revised their FY18 fiscal deficit estimates considerably upwards; the former by over 1 percentage point and the latter by close to 50 basis points. Karnataka, too, has allowed the deficit to widen by 20 basis points from the budgeted level, mainly because its revenue expenditure shot up. Except Uttar Pradesh, which cut revenue spending by 7% from the budgeted level — it stuck to the deficit estimate of 3% for both this year and next — the states that have presented new budgets have been slack in containing such expenditure of a recurring variety. Bengal’s higher deficit is primarily necessitated by a 8.2% fall in “own revenue” and 5.8% rise in capex, whereas Rajasthan’s fiscal slippage is despite a 6% capex cut. Among the other states, Chhattisgarh and Kerala have kept revised estimates of FY18 fiscal deficits more or less on a par with budget estimates, but their deficits are still above 3%. While Chhattisgarh has curbed capex by 12% to meet the targets, Kerala’s capital expenditure has conventionally been very small, compared with its budget size as the southern state spends heavily on salaries (44% of revenue expenditure). Jammu & Kashmir has traditionally been an odd man in the crowd, with the special privileges it enjoys — it cut capex by a significant 16% but is still poised to have a (revised) fiscal deficit of 5.7% in FY18, as against 4.9% last year.
Outperforming the Centre, Indian states had achieved creditable fiscal consolidation till FY12 (when their combined deficit stood at 1.93% of the GDP), but have since turned less prudent; the combined deficit widened to 2.69% in FY15 and the UDAY scheme for power discoms extended the fiscal gap to 3.03% in FY16 and further, to 3.67% in FY17 (UDAY allowed extra fiscal headroom to a maximum of 0.5% over and above the normal FRMB limit of 3% for FY16 and FY17). As the UDAY burden was set to largely removed in FY18, the states targeted aggressive deficit cuts for the year, but it now appears that there could be an overall slippage against the target. The cost of farm loan waivers will be spread over mainly FY18 and FY19, while pay hikes, in aggregate, are likely to have a larger impact on FY19 budgets. Despite the noises they make over transient shortages in the goods and services tax (GST) revenue, the new tax is unlikely to hit their finances: only if a state estimates GST revenue growth higher than 14% annually, it would have to budget for a revenue shortage on this account as the Centre is obligated to fully compensate them for five years if revenues fall below the 14% growth threshold. As per their latest budgets, West Bengal’s “own revenue” (which includes GST and other taxes like those on petroleum products and stamp duty), for FY18 is projected to be Rs 53,243 crore (RE), 8.2% lower than the original budget estimate; Kerala, too, has revised its estimate of “own revenue” to be 7.5% lower than the budget estimate, at Rs 60,552 crore. Most states have, however, put ambitious targets of “own revenue” for the next financial year, reflecting their confidence in the GST revenue buoyancy; Kerala is expecting a 20% growth in own revenue and Rajasthan 14.6%.
West Bengal will miss fiscal deficit target by 105 basis points as it has now reset the aim at 3% for FY18 from earlier estimate of 1.95%. The Central transfers (tax devolution and grants) to West Bengal are 50% more than the state’s own revenues in FY18, indicating poor revenue raising capacity of the state. The state’s debt-GDP ratio is projected to deteriorate from 34.1% in FY17 to 36.7% in FY18 and to 37.6% in FY19. The fiscal slippages of the Centre and states have mostly to do with less than the projected revenue. Although revenue spending hasn’t been curbed much in most cases, capex has been a casualty, reflecting that the subdued ability of the slippages to spur economic growth. The Centre, for instance, would miss the fiscal deficit target of 3.2% this year by 30 basis points even after cutting capex by 12%. The combined capital expenditure of 23 states stood at Rs 2.04 lakh crore in April-December this fiscal, down 2% from Rs 2.08 lakh crore in the year ago period. The Centre are states are shifting to a fiscal road map where overall debt reduction will have a principal role. In the latest Budget, the Centre reiterated its commitment for a revised fiscal glide path, and adopted the Debt Rule recommended by the FRBM Committee headed by NK Singh. The panel had suggested a ceiling for general government debt (both Centre and states) of 60% of GDP by 2022-23 from 73% in FY17. And within this overall limit, a ceiling of 40% is proposed for the Centre and 20% for the states. While the Centre’s debt-to-GDP ratio was 49.4% in FY17, that of states was 23.9%. With the slippages being seen now, meeting the debt reduction goals appears tougher.