States likely to step up borrowing in 4th quarter for social expenditures

Despite the lower availability of money from goods and services tax this year, key states have not significantly lowered their spending on social sector expenditure. In financial year 2019-20, when the growth rate of the Indian economy has come off the highs, this data is comfortable news for the poor. Millions of them depend on the spending by the states through various schemes as crucial income support. Any cut back here could have disastrous impact on their lives.
 
But for the markets, this could mean a rise in borrowings by the states in the last quarter of the year. Almost all states have raised much more debt than at the same time last year, except Maharashtra. Possibly due to the state election cycle, Maharashtra has hardly borrowed. This trend is likely to be reversed soon. If all states maintain their rate of spending on social sectors, which happens to be their largest spending category after interest payments and wages to government staff, there could be much larger draw on the markets by them, between January and March 2020. The numbers have a bearing on whether people are at risk of being pushed back into below poverty levels, because of the growth slowdown.
 
The data is from the progressive monthly accounts of income and spending of states for the period April to November (for a few states, the data has been finalised till October). It shows that compared with the level of expenditure made by the states for the past year, the numbers are holding up. This is impressive, since the states made no cut back in their budget estimates for expenditure for FY20. This means the comparisons hold across years.
 
Yet, as the data shows, there are massive shortfalls in the SGST and IGST shares the states have got. The shortages are quite large for Andhra Pradesh, West Bengal, Kerala, and Chhattisgarh where there are non-BJP governments, but also for states where they are in power including Uttar Pradesh and Gujarat. Surprisingly, while Punjab, too, has protested, data shows it is one of the rare states that have been over compensated.
 
The state budgets have fortunately been shored up by the impressive collections from state excise duties. Most of it is incidentally from liquor, which possibly explains why there are no inter-year variations. Where the states have enforced prohibition, their budgets have taken a hit. The only exception to this trend is Gujarat, since it has diversified its taxes into other areas over the past few decades.  
 
As a Business Standard report pointed out, the finance ministers of many of the Opposition-ruled states have strongly criticised the Centre for the shortfall in their GST receipts. In response, ahead of the GST Council meeting this month, Finance Minister Nirmala Sitharaman had released Rs 35,298 crore, due till October this year, as pending compensation.
 
The states have reasons to be critical. The data prepared by the Comptroller and Auditor General (CAG) shows the borrowing costs of the states rose sharply. This could get aggravated if the current trends continue. Some of them like Chhattisgarh, Karnataka, Gujarat, and Uttar Pradesh have already spent more than their monthly targets on social sector budgets. But others, too, have kept up the pace. The only outlier is Andhra Pradesh. Its sharp cut back of spending and yet the excessive borrowing that comes on top of its overhang from the past fiscal shows chief minister Y Jaganmohan Reddy could soon be staring at a major financial mess.
 
States spend most on the social sector through various anti-poverty schemes. The chief among them is under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). In MGNREGA, the states contribute 25 per cent of the total budget. The cost of the other schemes is shared in various ratios with the Centre. The Centre, however, always picks up the larger share. There have often been complaints that the states have delayed releasing the payments for their share of the schemes. The data from CAG shows, despite the resource crunch, the release of funds by the states have held up this time.

 
A CARE Ratings analysis on the subject notes: “From the point of view of states, GST is a major source of revenue and, hence, any shortfall will have a bearing on their ability to spend with capex being possibly affected in case of absence of funding.”