1. New fiscal deficit trends: States in deep mess while Centre turns prudent

New fiscal deficit trends: States in deep mess while Centre turns prudent

The fiscal deficit trends in the country have shown a stark reversal and the situation is expected to get worse in near future. Comparing with earlier trends, states were more fiscally prudent until about three years ago than the Centre, are now having bigger deficits.

By: | New Delhi | Published: July 19, 2017 11:40 AM
fiscal deficit,  UDAY scheme,  GDP,  debt, Uttar Pradesh, Tamil Nadu, Rajasthan, Punjab, Haryana, Andhra Pradesh. Uttar Pradesh and Maharashtra had an impact of Rs 70,000 crore due to farm loan waiver scheme. (Representational image)

The fiscal deficit trends in the country have shown a stark reversal and the situation is expected to get worse in near future. Comparing with earlier trends, states were more fiscally prudent until about three years ago than the Centre, are now having bigger deficits and facing biggest financial difficulty this financial year – two years after having breached the gross fiscal deficit of 3 per cent GDP threshold for the first time since FY’05, according to Indian Express. With the three key pressure, points this fiscal could be worse. First, being the spate of farm loan waivers across states, only Uttar Pradesh and Maharashtra had an impact of Rs 70,000 crore.

Second pressure point being the interest liabilities of states that have participated in the UDAY scheme for financial restructuring of electricity distribution utilities would increase going forward, as per a graded trajectory that goes up from 5 per cent of losses in FY’17 to 10 per cent of FY’18, given that the states are slated to take over future losses of these utilities. Third, with the effect of the latest Supreme Court’s order, closure of bars along highways and rising prohibition efforts across some states. At least a dozen of states are expected to see a substantial dip in state excise revenues from alcohol.

Due to bloating state deficits the combined fiscal deficit could continue to edge towards 7 per cent or even higher, even though Centre’s fiscal deficit has come down to 3.5 per cent and further projected to go down to 3.2 per cent this fiscal.

Keeping aside the above three pressure points, the states may face two additional fiscal stresses, one being the state governments commitment in respect of State Public Sector Enterprises that have emerged as a major source of potential risk to debt sustainability and the increase in committed liabilities of states if they decide to implement the recommendations of their Pay Commissions in 2017-18.

For noncompliance with fiscal prudence norms prescribed by the fourteenth finance commission, states like Uttar Pradesh, Tamil Nadu, Rajasthan, Punjab, Haryana and Andhra Pradesh, are not eligible for additional market borrowing, therefore, the situation may likely get worse, the report said. Uttar Pradesh in its budget for this fiscal had introduced a Rs 36,000-crore farm loan waiver scheme while on June 24 Maharashtra announced Rs 34,000-crore crop loan waiver for the farmers.

The Maharashtra government made the announcement, despite indications that Maharashtra’s public debt set to top the Rs 4 lakh-crore mark by March 2018 and the government facing the prospect of shelling Rs 31,027 crore from its plan, spend for 2017-18 to service the debt while Uttar Pradesh has seen the deficit zoom to Rs 64,320 crore in FY’16 which had a fiscal deficit of Rs 3,070 crore in FY’91, the report added.

Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India told The Indian Express that there will be pressure on states to achieve their budgetary target in FY’18…we do expect that states have to either mobilise their additional resources internally or reduce part of their expenditure to be in line with the fiscal target of 3 per cent.

According to RBI’s latest report on state budgets, the recent initiative by several state governments of assuming additional debt liabilities as part of restructuring state power distribution companies (through issuance of UDAY bonds) has led to deterioration in fiscal health of states. This has been reflected in the worsening of key fiscal indicators. It is expected that states will take necessary steps to renew their efforts towards fiscal consolidation and reduce their liabilities, the central bank added.

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