BS Analysis: States may not stick to fiscal consolidation road map

Over the past few weeks, several state governments have presented their Budgets for 2018-19. A Business Standard analysis of six of these state Budgets throws up interesting trends.

First, most of the states, for which the fiscal road map is available, are not projecting substantial reductions in either their fiscal deficit or 

outstanding liabilities by 2020-21.

Second, five of these six states expect their revenue receipts to grow at a slower pace in 2018-19. Third, under revenue receipts, while some have projected their tax revenues to grow at a slower clip in FY19, all have projected grants-in-aid from the Centre to slacken, compared to previous years. Fourth, most states have budgeted for a lower increase in total expenditure, compared to FY18. Finally, at the aggregate level, capital expenditure (capex) is budgeted to grow at a faster pace.

This is partly because of the base effect as some states have cut back on capex in FY18. The six Budgets analysed are of Chhattisgarh, Kerala, West Bengal, Jammu & Kashmir, Rajasthan and Uttar Pradesh (UP). This is only a preliminary analysis. The complete picture will be available only when all state 

governments present their Budgets.

On the fiscal deficit, there is reason for concern. According to the Fiscal Responsibility and Budget Management review committee headed by N K Singh, states had to reduce their deficit annually by 0.16 per cent till 2025, to keep their debt-to-gross domestic product (GDP) ratio at 21 per cent.The road map released by some of these states does not foresee such a reduction.

For example, Chhattisgarh expects its deficit to actually rise to 3.5 per cent of gross state domestic product (GSDP) in 2020-21, up from 3.07 per cent in FY19.

Outstanding liabilities are expected to increase to 21 per cent of GSDP in FY21, from 18 per cent in FY19. Rajasthan expects to maintain its current deficit (2.9 per cent) till FY21. The state has projected only a marginal decline in its debt-to-GDP ratio, from 32.76 per cent in FY19 to 32.02 per cent in FY21. 

Similarly, UP expects to keep its deficit (2.9 per cent) at current levels for the foreseeable future. The state expects its debt-to-GSDP ratio to come down marginally to 29.1 per cent in 2020-21, down from 29.8 per cent as on date. Kerala though expects a mild decline in its deficit, from 3.1 per cent in FY19 to 2.9 per cent in FY21, with debt falling from 30.7 per cent to 29.7 per cent over the period.  On the revenue side, total receipts of these six states are budgeted to grow 13.2 per cent in 2018-19, down from 19.8 per cent in FY18 (Revised Estimates or RE). By comparison, revenue receipts were actually budgeted to grow 23.7 per cent in FY18 (Budget Estimates or BE), implying shortfalls in collections. Kerala, West Bengal, Rajasthan and UP saw their own collections fall short of expectations in FY18. Perhaps mindful of this gap between projection and reality, some have opted for more realistic assumptions of revenue growth in their Budgets this time. Others have not. For example, UP saw its own tax revenue grow a mere 10.5 per cent in FY18, against a 29.7 per cent target. For FY19, the government has again projected collections to grow 29.2 per cent.

Most states saw transfers from the Centre on account of their share in taxes in line with Budget expectations. But, all have projected grants-in-aid from the Centre to slow down sharply in FY19. Grants-in-aid to these states are projected to grow at a mere 0.9 per cent, down from 58.9 per cent the previous year.

In FY18, UP, Rajasthan and Chhattisgarh received grants over and above what they had budgeted for. Others got less. UP has, in fact, seen the largest jump in grants-in-aid from the Centre. The state received Rs 711 billion in FY18 (RE), up from Rs 680 billion in its BE. This is a 118.7 per cent rise over the Rs 325 billion it received in FY17. On expenditure, these states have held back. Total expenditures are projected to grow 12.4 per cent, down from 17.6 per cent in FY18 (RE).

By comparison, states had projected expenditure to grow 19.9 per cent in FY18 (BE). Only Kerala and UP expect expenditure to grow faster in FY19. However, by recent trends, these projections might not be met. In the case of UP, total expenditure is budgeted to grow 16.3 per cent in FY19. But, in FY18, against a projection of 15.4 per cent, expenditure grew 10 per cent.

In Kerala, while the state projected an increase of 14.1 per cent in FY19, expenditure grew 8.8 per cent in FY18, against an expectation of 16.8 per cent.  Capex by these six states is budgeted at Rs 2.49 trillion, up 21.5 per cent from Rs 2.05 trillion in FY18. To put this number in perspective, the Centre’s capex for FY19 is budgeted at Rs 3 trillion. But, capex spending by these states actually slowed to Rs 2.05 trillion in FY18 (RE), down from Rs 2.07 trillion (BE), largely on account of lower spending by Chhattisgarh, Jammu & Kashmir and Rajasthan.