Fiscal stress: States slash capex on weak tax revenues

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Published: December 23, 2019 3:19:28 AM

Tax revenues of 17 states reviewed by FE were a flattish 0.4% in first seven months of 2019-20.

capex, capital expenditureThe Centre’s capex is estimated to be Rs 3.38 lakh crore in FY20 compared with Rs 3.03 lakh crore in FY19, while states’ capital expenditure is pegged to increase 29% on year to Rs 5.81 lakh crore in FY20.

State governments have been compelled to cut their capex in the current fiscal from the budgeted levels following sluggish growth in their tax revenues. Meanwhile, the Centre has accelerated its capital expenditure amid weak growth in tax revenues and asked the companies owned by it to invest more to address the demand slump in the economy.

The trend, a reflection of the acute fiscal stress being experienced by most states because of the overall decline in tax revenue growth, could weaken that one pillar of the economy — government expenditure — which has over the last two-three years given the much-needed support to the economy, while others — investment, private consumption and exports — have faltered.

According to data of 17 large states reviewed by FE (notable omissions are Bihar and Assam for non-availability of updated information), states’ capex grew a measly 1.4% in April-October this year, compared with a robust 32% in the corresponding period last year. In contrast, the Centre’s capex grew 13.6% during the first seven months of the current financial year, compared with 11.6% budgeted for FY20.

Given that about two-thirds of the general government capex is contributed by the states, the slashing of capex by states from the budgeted levels could deepen the economic slowdown.

The Centre’s capex is estimated to be Rs 3.38 lakh crore in FY20 compared with Rs 3.03 lakh crore in FY19, while states’ capital expenditure is pegged to increase 29% on year to Rs 5.81 lakh crore in FY20.

The CPSEs, on their part, had firmed up plans to invest about Rs 4.5 lakh crore in FY20, nearly the same as in the previous year (no aggregate data is now available about the investments they have actually made so far this year).

India’s real gross domestic product (GDP) expanded by just 4.5% in Q2FY20, the lowest quarterly growth for the country since Q4FY13. The GDP growth rate has been falling continuously since Q4FY18 when it stood at 8.1%.

While the Centre has more fiscal manoeuvring space than the states — it has substantial avenues to augment non-debt capital receipts and raise other non-tax sources of revenue besides more borrowing freedom — the decline in tax revenue growth is evidently hitting the state capex more hard. As many as seven states, including Andhra Pradesh, Rajasthan and Telangana, actually saw a decline in capex in April-October this fiscal.

Tax revenue growth of the 17 states reviewed by FE was a flattish 0.4% in the first seven months of this fiscal, compared with 13.7% in the year-ago period. While the shortfall in states’ GST revenues are compensated by the Centre, the payments are getting delayed due to the inadequacy of the relevant cess proceeds and a big overall GST revenue shortfall. The states’ revenue from their own taxes like stamp duty, registration fee, sales tax etc have taken an even bigger hit, as here, the protection is absent. The corporate tax cuts announced by the Centre alone are expected to reduce the tax transfers from the Centre to states from the divisible pool by as much as Rs 60,000 crore.

The precarious revenue position has forced many states to borrow more for revenue expenditure. Borrowings by these 17 states were up 23% in April-October of FY20, compared with an annual increase of 10.4% in the year-ago period.

Unless the states are allowed to resort to more borrowings, their capex could suffer in FY21 as well. Many states have already sought the Centre’s consent to allow their fiscal deficit to widen to 4% instead of 3% mandated by the FRBM. The glide path to bring down the Centre’s fiscal deficit to 3% has been repeatedly revised, with the latest deadline being FY21. For the current fiscal, the government has set the target at 3.3% against 3.4% in FY19.

While updated data on progress of the combined capital expenditure by central public sector enterprises (CPSEs) and departmental arms are not yet available, 32 CPSEs including ONGC, NTPC and IOC invested 31.4% of their annual capex target of Rs 1.52 lakh crore in April-August of this fiscal. Prodded by the finance ministry, these 32 CPSEs were to complete investment of another Rs 50,000 crore in the December quarter.

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