With many state budgets showing sharp rise in revenue expenditure amid freebies and dole-outs, the trends of fiscal consolidation and realistic budget in the states has become a passe, said a report by Elara Capital. Five states including Madhya Pradesh, Maharashtra, Rajasthan, Odisha and Telangana recently announced a revised budget due to the polls. The consolidated fiscal deficit of these five states now stands at 3.2 per cent vs 3.0 per cent budgeted in interim budget which can slip by 20-30 bps accounting for overestimation in revenues by certain states.
“Although the headline capital outlay as a percentage of GSDP has been retained, we see the likelihood of undershooting amid optimistic revenue budgeting. This should be negative for sectors such as urban infra and irrigation where state dominance is high in capex spends versus the Centre but should bode well for consumer demand especially at the bottom of the pyramid,” Elara Capital said.
The states that went to polls have projected an 8.5 per cent rise in total expenditure for FY25BE vs 5.3 per cent in Vote on Account budget (VOA), led by a 10.6 per cent rise in revenue expenditure in FY25BE vs 5.7 per cent in VOA. Compared with other states, Elara Capital said, the share of revenue expenditure as a percentage of GSDP is pegged higher at 14.7 per cent vs 13.9 per cent in other 14 states under its coverage. Further, the interest cost of these five states (S-5 states) is set to grow at a slower pace of 5.6 per cent on-year than 11.1 per cent in the rest of 14 states. This, per the report, suggests under budgeting in interest expenses to accommodate noninterest expenses within the revenue head without compromising.
“The populist schemes in the four states – Maharashtra, Odisha, Madhya Pradesh, Telangana – account for 587 per cent, 83 per cent, 94 per cent, 43 per cent respectively of the incremental revenue expenditure between FY25BE and FY24 RE,” Elara Capital said.
Increasing states revenue spending positive for consumption growth
Meanwhile, the report stated that a higher revenue spending should bode well for consumption demand, especially at the bottom of the pyramid. The analysis data by the brokerage firm since FY11 indicates that 100bps rise in revenue expenditure (revenue expenditure excluding interest payments) of S-5 states lead to 160 bps increase in YoY returns of Nifty FMCG Index.
“Since FY11, ~21 per cent of the move in the index is explained by YoY growth in core revenue spending of S-5 states, adjusted for outliers. Interestingly, since FY11 whenever core revenue spending in S-5 has been greater than average, Nifty FMCG YoY returns averaged ~21 per cent – nearly 340 bps higher than average,” it stated.
Over budgeting in revenue receipts
The Elara Capital report said that revenue receipts of S-5 states are likely to grow 11.4 per cent YoY in FY25BE vs 8.3 per cent YoY in VOA. “While the budgeting of own tax revenue of these S-5 states seems realistic at 11.3 per cent YoY vs 10.4 per cent YoY in VOA, there seems an obvious over budgeting in non-tax revenue in these states, primarily in Telangana,” it said, while maintaining that the budgeted growth rate of non-tax revenue of S-5 is likely to grow 17.5 per cent YoY in F25BE vs 3.8 per cent YoY in VOA vs 17 per cent in S-14. Moreover, grants from the Center for S-5 states are budgeted to increase by 5.1 per cent YoY compared to 7.9 per cent YoY decline in S-14 states, it added. Meanwhile, gross market borrowing of these five states increased by 6.1 per cent from VOA.
Centre batting for fiscal prudence
In the full Union Budget released recently, the Central government projected a fiscal deficit of 4.9 per cent in FY25BE. It remains steadfast in achieving 4.5 per cent Fiscal Responsibility and Budgeted Management (FRBM)- mandated target by FY26. “We believe following a consolidation path for the states will be challenging given the populist measures, unless capital spending is compromised. The fiscal deficit for S-19 is likely to be 3.1 per cent of combined GSDP for FY25BE, but it has the potential to rise 10-20bp GSDP accounting for optimistic revenue budgeting and taking into account continued trend in populism at the state level,” the report stated.