State governments controlled their spending in the first quarter of FY27 despite weak revenue growth. But they are still likely to overshoot the aggregate fiscal deficit target of 3.1% of GDP for the year by 20 basis points due to weaker revenues amid a focus on capital expenditure, Emkay Global Financial Services said in a report.
States were in a stable position in April-June, with fiscal deficit accounting for 18% of the Budget targets. However, the fiscal deficit at 18% of BE is higher than the five-year average of 13%.
“This is largely on account of poor revenue, led by lower transfers from the Centre. Both devolution and grants are running far lower than last year’s levels – the major factor behind states’ slow revenue growth,” Emkay Global economists said. “However, lower devolution is largely an issue of timing; with the Centre having now released an extra instalment in August, this mismatch will be corrected imminently.”
States’ revenues are expected to improve in the second half of FY27, which is a seasonally stronger period for states’ revenue, Emkay Global said.
Several major states have also raised alcohol excise rates or revamped their alcohol excise policies over the past 18 months, resulting in a double-digit growth in excise revenue so far, the report said. “Nevertheless, states are expectsed to undershoot optimistic FY27BE revenue targets across both OTR (own tax revenue) and central transfers.”
States will have to control expenditure to meet deficit targets, Emkay Global said. Revenue expenditure is likely to be stickier, while capex will also remain robust, aided by the Centre’s capex loan program, the report said.
As a result, Emkay Global expect states’ fiscal deficit to be 3.3% of GDP against the BE of 3.1% of GDP.