States to end FY22 on a slightly better note

By: |
October 18, 2021 5:45 AM

States must spend on capex so that the quality of the deficit improves; so far, this has been modest

As of now, the capex trends are nothing to write home about and one would need to see a smart pick up in the second half of the year for the targets to be surpassed.As of now, the capex trends are nothing to write home about and one would need to see a smart pick up in the second half of the year for the targets to be surpassed.

Despite a quicker-than-expected recovery and better collections from levies on auto fuels, the financial position of states as a whole is unlikely to improve meaningfully in the current year. While the second wave was undoubtedly much less damaging than the first one, the localised lockdowns did hit business; moreover, much of the pent-up demand seen in Q2 and Q3FY21, could be missing or be of a much smaller magnitude this time around.

While, for a group of 20 states, tax receipts are up a smart 34%—at Rs 6.86 lakh crore for the April-August period—there has been some help from a low base although that’s beginning to fade. While states have used the money to spend a fair bit on capital expenditure, the combined amount spent, of Rs 1.21 lakh crore, is at best modest. It might seem like a big jump of 70% year-on-year and 10% higher than the corresponding period of FY20, but that is on a weak base. It is not bad given the second wave did hamper activity, but states might still miss the year’s target of Rs 5.84 lakh crore, which would translate into a 9% rise. What is encouraging is that the revenue expenditure has been a lot more muted, having risen 10% on year.

In general, the states could end FY22 on a slightly better note. ICRA Research estimates the fiscal deficit, for a sample of 12 key states, would improve to Rs 6.22 lakh crore or 3.4% of the gross state domestic product (GSDP) in FY22, similar to the budgeted levels of Rs 6.28 lakh crore. In FY21, the combined deficit was 3.9%. However, it is important, states spend large sums on capex; that would boost the quality of the deficit. As of now, the capex trends are nothing to write home about and one would need to see a smart pick up in the second half of the year for the targets to be surpassed.

To be sure, some aggregate numbers often mask the real picture. As such, while some states will tide over the crisis, several others are short of resources and seem to have over-estimated revenues. Consequently, the overall quality of the financials is unlikely to match that in their Budget Estimates. Should the Centre stop compensating states for a shortfall in revenue growth of below 14%, as seems likely, a few states would be woefully strapped for funds post June 22. Among these are Punjab, Karnataka and Gujarat.

The state GST (or SGST) collections accounted for around two-fifths of the aggregate own tax revenues (SOTR) and around a fifth of the states’ total revenue receipts in the last three years. So, while it may not account for the bulk of revenues, the compensation is nonetheless sizeable. It is true states tend to get complacent when they are being compensated and the government is justified when it explains that collections from the cesses, until March 2026, would be needed to repay borrowings that are being made to compensate states for revenue shortfalls. In the current year, the cesses could yield a good Rs 1.59 lakh crore less than needed. Also, the recovery is reasonably strong and, barring a third wave, the economy should open up further over the next few months; that would yield the states more revenues from other sources. Again, the states should not object to changes in the GST structure with fewer but higher rates. It is in their interest the GST becomes a more effective levy.

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