Countering RBI’s argument that the higher fiscal deficits of the states in FY16 was due to Uday bonds that bailed out ailing electricity discoms, an India Ratings report has linked to higher capex by the states. According to the State Finances Report 2016-17 released by the Reserve Bank last Friday, excluding Uday bonds, the combined fiscal deficits of the states would have been 2.7 per cent of GDP. But including this, deficits jumped to a 12- year high of 3.6 percent, which is the highest since FY04 when it had stood at 4.2 percent. “Though states’ fiscal deficits rose to the highest since FY04 at 3.6 percent in FY16, the expansion of state budgets have been mainly due to higher capital expenditure, which is a long-term credit positive for the states,” India Ratings said in a note today.
In fact, fiscal deficits of the states have been showing an increasing trend since FY12 when it stood at 1.2 percent of GSDP. Between FY12 and FY16, the combined fiscal deficit of the states rose by 1.7 percent of GDP. This was mainly because from a 30 bps revenue surplus in FY12, their finances saw a revenue deficit of 20 bps of GDP in FY16. This period also saw the states together adding 1 percent of GDP to the fiscal deficit by way of capex, the report said.
“The average growth of states’ aggregate capex during FY12-FY16 was 23.7 percent. Between FY12 and FY16 close to 60 percent of total capex by the states was divided almost equally between transport (mostly roads and bridges), power and irrigation sectors,” the report said. While the Centre’s capex remained under 2 percent of GDP since FY12, the combined capex-GDP ratio of the states has remained over 2 percent since then. What is noteworthy about this is that the states restrained themselves from blowing up the higher devolution of funds that received from the Centre after the 14th finance commission awards.
“Data suggest that expansion of state budgets have taken place mainly on account of capex, which is a long-term credit positive for states,” notes the report. While the states finance report noted a deterioration in the states’ fiscal deficits in FY16 at 3.4 per cent, the RBI termed overall fiscal position was sustainable in long run listing GST as a big positive for finances. “Despite the increase in the debt burden of the states in recent years, the overall fiscal position is found to be sustainable in the long-run,” the report said but warned that the increasing proclivity of the states to write off farm loans may scupper the positives.
On the sustainability of high debts of the states, the report said “empirical assessment of the inter-temporal budget constraints in a panel data framework covering 20 states for the 1980-81 to 2015-16 period indicates sustainable debt position of states in the long-run”. On the farm loan waivers, the RBI said, “while these loan waivers may alleviate the immediate debt burden of financially distressed farmers, it is essentially a transfer from tax payers to borrowers with an adverse bearing on the fiscal viability of states”.