Fiscal profligacy by poll-bound states needs to be closely watched: UBS

Fiscal profligacy by poll-bound states needs to be watched closely, as higher spending on welfare measures will impact capital expenditure over the coming years, a Swiss brokerage said on Friday.

A total of 11 states have gone to polls or are likely to have elections soon, the report by UBS Securities said, adding that four of them -- Maharashtra, Madhya Pradesh, Rajasthan and Odisha -- have increased their fiscal deficit targets.

"The recent fiscal profligacy seen in poll-bound states should be watched closely," the report said.

In the last few years, states managed to control their fiscal deficit under the 3 per cent level proposed by the Fifteenth Finance Commission, the report said, acknowledging that the Centre has also been bringing down the fiscal deficit.

 

The poll-bound states are increasing their welfare spending and stimulus, which has led to a widening in their aggregate FY25 fiscal deficit estimates by 0.20 per cent in the budgets presented in June or July, it said.

"We believe this could also weigh on states' own capex spending over the coming years due to higher revenue expenditure directed towards populist promises," it added.

It can be noted that in Maharashtra, the Eknath SHinde-led government has announced to deposit Rs 1,500 into the accounts of women, which will result in an annual spend of over Rs 35,000 crore.

Meanwhile, the brokerage said it does not expect the RBI to start the rate cut cycle at the next month's policy review and the earliest that the monetary policy committee would act will be in December.

The RBI is set to cut by a deeper 0.75 per cent during the current cycle, it said, adding that factors like low food inflation and decent monsoons will offer more comfort.

India's consumption growth will pick up to over 6 per cent in FY25 from 4 per cent in FY24, the brokerage said, adding that even after the acceleration it will still be trailing the long-term average.

There is a "fatigue" in the premium segment which will lead to a narrowing in the "k-shaped" consumption pattern seen over the last few years, it said.

The GDP growth will come at the 6.5-7 per cent levels pegged in the Economic Survey and will not come at the RBI's estimate of 7.2 per cent, it said.