While the Centre’s capital expenditure (capex) in the April-June quarter was more than a quarter higher than the year-ago period, the state governments seem to have applied brakes on their capex to curb borrowings and remain on the fiscal consolidation path. Their revenue spending, however, are almost in line with the budgets.
Data reviewed by FE of 14 states show that their aggregate capex in April-June this fiscal was Rs 30,922 crore, just 11% of the combined annual target and 19% lower than what was achieved in the year-ago period. In case of some states, the deceleration of capex was so steep to negate the demand push in the economy which the Centre is trying to impart via higher public investments.
Bihar, for instance, spent just Rs 1,371 crore to create new assets in April-June this year, 67% lower than in the year-ago period, as the sluggish tax revenue (it collected less than 4% of the annual target in Q1) forced it to curb spending and resort to higher borrowings. While the compensation mechanism under the goods and services tax (GST) ensures states’ annual GST revenue growth is at least 14%, many states like Bihar are witnessing much slower growth in their own tax revenue (which, though varies from state to state, is roughly half of the overall tax revenue). Tamil Nadu and Karnataka too had to take an axe to their capex — in Q1, both spent amounts 38% lower than in the year-ago period.
Unless the states correct the trend, the economic growth could be hit. According to data reviewed by FE, in FY18, 17 states in aggregate had cut capex by a steep 22%, which allowed them to keep their combined fiscal deficit at a benign 2.64% of their aggregate gross state domestic product. Under the Fiscal Responsibility and Budget Management Act (FRBM), states have to contain their fiscal deficit at 3%.
The Centre’s budgetary capital expenditure in April-June 2018 stood at Rs 86,988 crore, 27% higher than the same in the year-ago quarter and 29% of the full-year target, indicating the continued heavy reliance on public investments for growth amid scarce evidence of a much-awaited recovery in private investments.
While the budget estimates unveiled by the states for FY19 indicate a consolidated gross fiscal deficit of 2.6% of GDP, the RBI in a recent report cautioned that, “visible fiscal pressures are emerging for several states on the expenditure side”,and pinned hopes on the stablisation of the GST “that should boost states’ revenue capacity and support the resumption of fiscal consolidation”.
The pressures referred to are announcement of farm loan waivers (six states have already announced such largesse amounting to a total of Rs 1.26 lakh crore) and the Seventh Pay panel-induced salary/allowance hikes for state governments’ staff.
The overall expenditure of states, however, were more or less in line with recent trends in Q1. The revenue expenditure of the 14 states reviewed by FE (including Maharashtra, West Bengal, Kerala, Rajasthan, Madhya Pradesh, Telangana, Punjab, Uttarakhand, Jharkhand, Himachal Pradesh and Nagaland) in Q1FY19 was at Rs 3.22 lakh crore, up 14.7% year-on-year or 18.52% of the full year target of Rs 17.39 lakh crore against 18.3% of the relevant target in the year-ago period. Tax revenue of these states stood at Rs 2.32 lakh crore, up 9% y-o-y, and 19.2% of the full-year target of Rs 12.08 lakh crore (19.1% of the target in the year-ago period).
With Bihar and Telangana front-loading their market borrowing in Q1FY19 to meet expenditure commitments on weak tax receipts, the market borrowings of the 14 states were at Rs 67,431 crore, 21% higher than the year-ago period.
Apart from the Centre’s and state governments’ capex, public investment includes substantial annual capex by the PSUs and agencies of the Centre as well as the states. While all central PSUs and agencies rolled out capital investments of Rs 3.4 lakh crore in FY17, the figure jumped 18% to a little over Rs 4 lakh crore in FY18 (revised estimate), under the Centre’s prodding and a similar amount is budgeted for FY19 as well.