The Economic Survey's latest volume had predicted that farm loan waivers by state governments could impart a short-term deflationary shock to the economy.
The Economic Survey’s latest volume had predicted that farm loan waivers by state governments could impart a short-term deflationary shock to the economy as the largesse would be funded by pruning spending and raising taxes, but it seems states started squeezing capex from the first quarter of the current financial year. The combined capital outlay of 12 states — with revenue receipts close to 60% of all 29 states — contracted 19.3% in Q1FY18 compared with a strong 51.9% growth in the year-ago quarter, Icra said in a report.
The decline in states’ capex could not have come at a worse time for the economy, given its greater reliance on government spending as other growth engines are faltering.
Thanks to the early presentation of the Union Budget this year, the Centre’s capex grew 39% in Q1FY18 compared with a decline of 16% in the year-ago quarter; its revenue spending grew 25.9% in Q1 this year against 24% expansion in the same quarter of last year. With shortfalls likely under some revenue heads, the Centre would find it hard to keep the Q1 spending momentum throughout the year, which makes it incumbent on states to accelerate their spending.
According to Icra, the reduction in capital outlay by the 12 states is despite a healthy 16.5% expansion of their own tax revenue (OTR) and an estimated 18.3% rise in central tax devolution to them. Pertinently, Q1 is the quarter immediately before the roll-out of the goods and services tax, and which saw de-stocking by businesses (with a positive impact on trade and therefore state VAT receipts). Chances are that GST implementation would sustain the revenue buoyancy.
Of course, the capital outlay contraction by the dozen states reviewed by the rating agency is partly on account of the delayed budget presentation by Uttar Pradesh and Punjab, which went to polls in February; excluding these two states, the capex of the remaining 10 states rose by a modest 6.2% in Q1FY18, sharply lower than 45.9% in Q1FY17.
As far as the 12 states’ revenue expenditure is concerned, growth eased to 10.3% in Q1FY18 against 15.9% in Q1FY17. These states, therefore, produced a combined revenue and fiscal surpluses in the first quarter of this financial year.
The budgeted capex figures of the Centre and states are comparable: The Centre spent Rs 68,328 crore in April-June this year while the 12 states reviewed by Icra — with roughly 60% representation — spent Rs 38,500 crore.
The April-June quarter GDP data released recently has increased concerns about the economy, with nearly all components of demand on the decline: Private consumption, government consumption, net exports contracted from the previous quarter whereas investment growth, which was on a precipitous fall for several quarters, grew a meagre 1.6% in Q1FY18 compared with a contraction of 2.1% in the previous quarter.
Available information pertaining to 26 state governments indicates a deterioration in gross fiscal deficit (GFD), revenue and primary deficits in 2016-17 (RE) vis-à-vis the BE. The revenue account worsened because of a shortfall in revenues and expenditure overshooting. Compared with the actuals of the previous year, the consolidated GFD increased by 0.4 percentage point to 2.9% of GDP in 2016-17.
The Reserve Bank of India has said in its annual report 2016-17 that the GFD-GDP ratio of states is budgeted to improve to 2.3% during FY18 from 2.9% in the RE for 2016-17, largely on the back of a projected rise in tax revenue — both own tax revenue as well as tax devolution — and moderation in revenue expenditure. The revenue account, it said, was also expected to post a surplus during the year. However, the central bank also highlighted certain risk factors such as implementation of the states’ own pay commission recommendations and farm loan waivers. According to Icra, regardless of the back-loading of spending by the 12 states, “the completion of the takeover of debt (related to the UDAY scheme for power discoms) by the state governments would weigh upon the growth of capital expenditure in FY18”.
The 12 states studied by Icra include Uttar Pradesh, Punjab, Rajasthan, Chhattisgarh, Karnataka, Madhya Pradesh and Odisha.