1. States’ deficit to hit 13-year high in FY17

States’ deficit to hit 13-year high in FY17

Even as the Centre plans to soon release the NK Singh panel report on fiscal discipline, it has become incumbent on it to impress upon states at the earliest to curb their fiscal deficit.

By: | New Delhi | Updated: March 14, 2017 4:54 AM
Unless states reduce their primary deficit from the current 1.8% of their GDP to 1% over the next three years, their debt-to-GDP ratio will worsen, JP Morgan’s Chinoy has cautioned. (PTI)

Even as the Centre plans to soon release the NK Singh panel report on fiscal discipline, it has become incumbent on it to impress upon states at the earliest to curb their fiscal deficit, which is expected to touch a 13-year high of 3.4% of their gross domestic product (GDP) in 2016-17, threatening to reverse gains from the Centre’s restraint in recent years.

Between FY13 and FY17, while the Centre has cut its fiscal deficit from 4.9% of GDP to 3.5%, states’ deficit has gone up from 2% of their GDP to an expected 3.4% this fiscal, according to a report by JP Morgan’s chief India economist Sajjid Chinoy and associate Toshi Jain.

Some analysts, however, argue that spending by states have aided the Centre’s effort to pep up the economy at a time when private investments are hard to come by.

The spotlight anyway is back on finances of states, which had adhered to strict fiscal discipline in the aftermath of the global financial crisis when the Centre had to resort to bailout packages to spur the economy.

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Already, states used up as much as 60% of their targeted deficit up to November this fiscal, compared with 46% a year earlier. At this rate, the actual fiscal slippage is expected to touch 3.4% of states’ GDP in 2016-17, compared with the budgeted 2.8% for this fiscal, the report said (The deficit calculations don’t factor in UDAY bonds). This means the consolidated fiscal deficit (of both the centre and states) will remain flat at 7%, in sync with the trend of the previous three years. For its part, the Centre aims to trim its fiscal deficit to 3.2% in 2017-18 and to 3% the year after.

Unless states reduce their primary deficit from the current 1.8% of their GDP to 1% over the next three years, their debt-to-GDP ratio will worsen, JP Morgan’s Chinoy has cautioned. Coupled with the State Pay Commission liabilities, the growing deficit could put real pressure on the NK Singh-led FRBM Committee’s recommendations to reach a consolidated debt-GDP ratio of 60% by 2023, he said.

Jayanta Roy, group head (corporate sector rating) at Icra, said state governments’ gross market borrowings are expected to rise even further to R4.5 lakh crore in 2017-18, against R3.7 lakh crore in FY2017, on the expectation of rising fiscal deficits led by the pay revision and servicing of the UDAY debt, a spike in debt repayment from FY18 onwards and the exclusion of most state governments from investing in the National Small Savings Fund from April 1, 2016.

According to a Deutsche Bank report, capex spending by states has increased substantially since 2015-16 for most states.

The project completion rate of all states rose 104% between April and December 2016 from a year earlier. Importantly, year-on-year growth momentum is stronger at the state government level (+104%) than at the general government level (-13%) between April and December 2016, suggesting greater traction in state government capex.

Thanks also to states, government final consumption expenditure is estimated to rise 17% in the current fiscal, the highest since the new GDP series with 2011-12 base year was introduced. This partially made up for the absence of private investments, which is reflected in the fact that gross fixed capital formation is estimated to rise only 0.6% in 2016-17, the lowest in the current GDP series and compared with 6.1% a year earlier.

  1. P
    Padmanabh
    Mar 14, 2017 at 8:33 am
    Now that Modi is in control of most of the States in India, let us see how Modi Government in the Center will help the States to tide over the deficits. It remains to be seen if Modi will avail of his control over State Governments and Rajya Sabha merely for appointment of L. K. Advani and Murli Manohar Joshi as the President and Vice President of Indian Republic
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