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Rising finances of states may push up general deficit amid economic slowdown

Rising finances of states may push up general deficit amid economic slowdown

It appears that India’s general (Centre and states) fiscal deficit target is likely to be
under stress.

Days after Finance Minister Nirmala Sitharaman hinted at an unavoidable breach in the Centre’s 3.4 per cent deficit target for FY20, a cursory look at the states’ rising finances (higher spending and borrowing) indicates that the combined deficit, too, will take a hit this fiscal.

For instance, Moody’s pegs state-level deficit at 3 per cent of GDP in FY20, and adding the Centre’s projected 3.7 per cent, the general deficit will be over 6.7 per cent—higher than the FRBM target of 6 per cent.

Interestingly, just two years ago, thanks to states’ mindful spending, overall deficit stood lower than 6 per cent in FY18 and FY19 (projected estimate).

But now, with states and the Centre under pressure to spend and revive the economy, economists anticipate ballooning deficit this fiscal and potentially even in the next one.

“Indian states do not generate sufficient own source revenue to cover their spending needs. The introduction of GST in 2017 has further increased states’ reliance on central government transfers,” said Gjorgji Josifov, Assistant Vice President and Analyst, Moody’s.

Further, states’ debt burden is also expected to increase to fund significant infrastructure needs. States’ gross borrowing needs are budgeted at Rs 7.5 lakh crore or 3.4 per cent of GDP in FY20, a 28 per cent increase over FY19.

Meanwhile, Motilal Oswal’s study of state finances too found that states’ fiscal deficit stood at 37.6 per cent of budget estimates in the first six months of FY20, higher than 31.8 per cent a year before.

While total government spending grew at its fastest pace at least since FY13 during Q2, such a strong spending spree is unlikely to continue for the rest of the fiscal.

“This is because the combined fiscal deficit of general government has already reached 73 per cent of Budget Estimate in H1, FY20,” it noted.

Among the states, some like Odisha are even attracting the wrath of the CAG, which pulled it up for ‘mindless borrowing’ ignoring the 13th Finance Commission recommendations.

Similarly, Kerala’s fiscal deficit too is bursting at the seams, yet the state refrains from any expenditure compression.

According to the Economic Survey 2018-19, the combined deficit will likely settle at 5.8 per cent of GDP in FY19 as against 6.4 per cent in FY18. This is a decade-low and the third-lowest on record since the 1990s.

The FRBM mandated a general deficit of 6 per cent was achieved solely because of states under-spent during both years.

In FY18 too, states spent between 77 and 99 per cent of their respective budgeted figures, including large states such as Maharashtra and Uttar Pradesh, which didn’t even achieve 90 per cent of their spending target.

Consequently, states’ FY18 deficit as a percentage of GDP stood at 2.4 per cent, lower than the estimated 3.1 per cent and the targeted 3 per cent. As against the budgeted Rs 34.1 lakh crore for FY19, states’ actual spending was likely to be Rs 31.2 lakh crore, implying a growth of 14.9 per cent in FY19.

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