Moderate growth in sales tax collections and substantial expansion in grants from the Centre have prevented a sharp cut-back in expenditure growth of the state governments after the note ban, says ICRA.
According to the rating agency, higher capital spending and extension of loans were also the chief drivers of the sharp rise in states' fiscal deficits as well as borrowings in FY2017.
"The note ban has selectively affected some revenue streams of the state governments, such as stamps and registrations collections and land revenue. However, moderate growth in sales tax collections and substantial expansion in grants from the Centre have averted a sharp cut-back in their expenditure growth," ICRA Group Head - Corporate Sector Rating Jayanta Roy said.
He further said the 16 per cent expansion in the states' capital spending outpaced the 12 per cent rise in their revenue expenditure between April-January of FY2017, and stood in sharp contrast to the 3 per cent contraction in the Centre's capital expenditure in the same months.
"Higher capital spending and extension of loans, which may be partly on account of the UDAY scheme, appear to be the chief drivers of the sharp rise in the states' fiscal deficits in April-January FY2017," Roy added.
The ICRA study is based on monthly unaudited fiscal data for April 2016-January 2017 published by the Comptroller and Auditor General for eight states including Chhattisgarh, Gujarat, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab and Tamil Nadu, which together account for nearly 50 per cent of the country's GDP.
The fiscal deficit of these states rose sharply to Rs 92,270 crore in April-January FY2017 from Rs 66,690 crore in April-January FY2016, led by higher capital spending and extension of loans and advances, which may be partly on account of the UDAY scheme.
The gross state development loans raised by these eight states in April-January FY2017 were also Rs 26,472 crore higher than the amount raised in April-January FY2016, similar to the rise in their combined fiscal deficits.
Unaudited data for the first 10 months of FY2017 indicates a 12 per cent rise in the revenue receipts of the eight states, boosted by the 36 per cent expansion in grants from the Centre and 16 per cent growth in the states' own non-tax revenues, whereas tax revenues rose by 9 per cent.
Incremental receipts of grants from the Centre of Rs 23,658 crore, have nearly rivalled the rise in states' own tax revenues (SOTR), estimated by ICRA at around Rs 26,000 crore in 10M FY2017.
On the expenditure side, the 16 per cent expansion in states' capital spending outpaced the 12 per cent rise in their revenue expenditure in 10 months of FY 2017.
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