Fiscal deficit: States cut capital expenditure to meet FY19 targets

By: |
Published: August 18, 2019 1:06:44 AM

In contrast, the Centre’s fiscal deficit stood at 3.5% in FY18 and 3.4% in FY19, mainly bec-ause it had to step up spending to boost growth in the absence of private investors.

Last fiscal, it deferred its goal of achieving the 3% deficit yet again, this time by two years to FY21. (Representational Image)Last fiscal, it deferred its goal of achieving the 3% deficit yet again, this time by two years to FY21. (Representational Image)

The Centre may have continued to defer its goal of containing fiscal deficit at 3% of GDP, but states seem to have gone into an overdrive to tame the deficit by resorting to massive cuts in spending, especially capex.

As per data vetted by the Comptroller and Auditor General, 27 states (barring Assam and Goa for which data are not available) reported their combined fiscal deficit at 2.53% of their aggregate gross state domestic product (GSDP) in FY19, well within the 3% target set under the Fiscal Responsibility and Budget Management (FRBM) Act and compared with 2.7% in FY18. But this was after a 11.3% reduction in revenue expenditure from the budgeted level to Rs 25.17 lakh crore and even a steeper 23.2% cut in capex to Rs 4.23 lakh crore.

Such fiscal consolidation through massive compression in productive capital spending, however, may have had unintended consequences like a slowdown in their economic activity. This, in turn, is likely to have aided a slide in the national GDP growth to a five-year low of 6.8% in FY19.

In contrast, the Centre’s fiscal deficit stood at 3.5% in FY18 and 3.4% in FY19, mainly bec-ause it had to step up spending to boost growth in the absence of private investors. Last fiscal, it deferred its goal of achieving the 3% deficit yet again, this time by two years to FY21.

Interestingly, despite the announcements of farm loan waivers by some, state governments managed to maintain fiscal consolidation, achieved by them in FY18 after two years of disruption (with deficit at 3.1% in FY16 and 3.5% in FY17 due to UDAY scheme).

Apart from sharp spending cuts, the assured GST revenue growth of 14% under a compensation scheme has also helped states, with many of them either meeting the tax revenue targets or coming close to it. However, while the aggregate fiscal deficit of states has remained well within the target, regional disparity was too stark to miss.

The deficits of Odisha, Punjab, Maharashtra and Uttar Pradesh came considerably lower than their respective Budget estimates (BEs)—by a huge 1.45 percentage points for Odisha, 1.06 percentage points for Punjab, 0.93 percentage point for Maharashtra and 0.66 percentage point for Uttar Pradesh. However, Jammu & Kashmir allowed the deficit to widen by 1.6 percentage points from the BE level to 7.7%, mainly because its tax revenue fell short of the target and revenue expenditure rose. Andhra Pradesh, Rajasthan and West Bengal also reported higher deficit than their budgetted levels.

Punjab, Kerala, Chhattisgarh, Bihar and Telangana cut capital expenditure the most in FY19. Punjab cut capex by 60% from its BE level, followed Kerala and Chhattisgarh with a 35% cut each.

Outperforming the Centre, states had achieved creditable fiscal consolidation till FY12 (when their combined deficit stood at 1.93% of the GDP), but turned less prudent afterward; the combined deficit widened to 2.6% in FY15 and the UDAY scheme for power discoms worsened the fiscal gap to 3.1% in FY16 and to 3.5% in FY17. As the UDAY burden was largely removed in FY18, the states targeted aggressive deficit cuts for the year.

Do you know What is Wholesale Price Index (WPI), Public Debt, Finance Commission Grants & Other Transfers, Economic Survey, State Finance Commission? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.