Five key messages from analysis of state budgets

All Indian states and union territories have presented their state budgets for 2022-23
A research note dated April 18 by SBI chief economist Soumya Kanti Ghosh put the 2022-23 consolidated gross fiscal deficit to GSDP ratio for 18 states at 3.4%.(Mint) PREMIUM
A research note dated April 18 by SBI chief economist Soumya Kanti Ghosh put the 2022-23 consolidated gross fiscal deficit to GSDP ratio for 18 states at 3.4%.(Mint)
Updated on May 23, 2022 11:15 AM IST
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All Indian states and union territories have presented their state budgets for 2022-23. While state budgets are spread over a time period and not as coherently and methodically presented as the union budget – a comprehensive analysis of state finances still depends on the RBI handbook on state finances – they play an important role in the Indian economy. A comparison for 2021-22, the latest period for which RBI data on state finances is available, shows that the total spending of states was 1.23 times that of the union government (or 8.12 lakh crore more).

While RBI has still not published its analysis of 2022-23 state finances, HT reviewed state budget documents and used some already published analyses to pinpoint five key takeaways on state finances.

A post-pandemic fiscal consolidation is underway, but there are significant regional variations

While all states have presented their budgets, a calculation of the Gross Fiscal Deficit to Gross State Domestic Product (GSDP) ratio is not possible for all states due to unavailability of the nominal GSDP number for 2022-23. A research note dated April 18 by SBI chief economist Soumya Kanti Ghosh put the 2022-23 consolidated gross fiscal deficit to GSDP ratio for 18 states at 3.4%. These states are Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Rajasthan, Tamil Nadu, Telangana, and West Bengal. HT has been able to put together the absolute level of gross fiscal deficit and nominal GSDP number for 2022-23 for six more states, namely Sikkim, Nagaland, Mizoram, Meghalaya, Manipur, and Goa. Once the numbers for these 24 states are combined, the Budget Estimate (BE) for consolidated gross fiscal deficit ratio comes to 3.6%.

A comparison of this number with past numbers for these 24 states shows that while the fiscal deficit ratio has come down compared to 2020-21 and 2021-22, it is still higher than pre-pandemic levels of 3.4% in 2019-20. This has profound implications in raising the consolidated debt to GSDP ratio of the states, which is expected to peak to 33.3% in 2022-23 as per the 15th Finance Commission’s report.

To be sure, the headline fiscal deficit numbers hide significant divergence in deficits across states. While Gujarat has the lowest gross fiscal deficit ratio at 1.6% for 2022-23, Manipur has the highest at 6.38%. Other states such as Rajasthan, Madhya Pradesh, Meghalaya, and Himachal Pradesh have this ratio breaching the 4% level. About 15 states are likely to have gross fiscal deficit ratios between 3% and 4% for 2022-23. In normal circumstances, the states are mandated to maintain their respective gross deficit ratios within the limit of 3% under the Fiscal Responsibility and Budget Management (FRBM) Act of 2003. Because of the pandemic, the centre raised this limit to 4% for 2022-23 and extra 0.5% for those states that undertake reforms in the power sector. Therefore, going forward, the path towards fiscal consolidation is a bigger challenge for some of these states.

What is happening to spending by the states?

Once again, due to lack of coherent state budget documents, this analysis is not possible for all states. The SBI research note referred to above has estimated the consolidated expenditure to be around 40 lakh crore for 2022-23, which is 9.56% more than the Revised Estimates (RE) for 2021-22. Within this, the capital and revenue expenditure is expected to grow at 13.8% and 8.5% respectively, from the revised numbers for 2021-22, as per the calculations in the SBI note. Once again, there are large-scale regional differences in the spending pattern of these 21 states for which SBI research has been able to put together this data.

But nominal numbers on spending growth could be misleading

Because budgetary numbers are always in nominal terms, mechanically looking at them over a longer period without accounting for changes in inflation can give a misleading picture. Here is why. India’s nominal and real GDP growth is expected to be 19.41% and 8.95% in 2021-22. This gives a GDP deflator of 10.46%. The GDP deflator had been falling consistently for many years until 2019-20, after which it has seen a sharp rise. This also means that for similar levels of growth in nominal spending, real stimulus to the economy would come down as the GDP deflator increases. Once the inflation adjustment is made to state spending (BE) numbers until 2021-22, the growth appears to be far more muted.

 

That inflation could have given an upward bias to the perceived fiscal support to growth was underlined by Sajjid Chinoy, JP Morgan’s Chief India Economist recently. “Disentangling how much of the buoyancy in nominal variables is on account of inflation versus growth of volumes is key to calibrating policy appropriately. Meanwhile, given the relatively moderate growth of real variables, fiscal policy will have to continue giving growth a helping hand,” Chinoy wrote in a Bloomberg Prime article. (https://bit.ly/3l1HcjM)

Adding to complication, over half of state-spending may be pre-committed

The ability of budgets, at any level, to play a counter-cyclical role comes under pressure when a large share of the spending is already pre-determined. This problem is extremely acute for some Indian states, as has been shown by the SBI Research note referred to above. Taking committed expenditure as the expenditure on salaries, pensions, and interest, the SBI Research note shows that the average share of committed expenditure in total receipts of the state governments for 16 states rose to 56% in 2022-23, from 54.7% in 2021-22. This number is more than 70% for states such as Kerala and Himachal Pradesh, the note said. “Many states are offering freebies such as farm loan waivers, restoring old pension systems, etc., announced in recent assembly polls, which are economically unsustainable given the financially bad shape of many states. Telangana has committed 35% of its revenue receipts or 63% of its tax revenue to populist schemes. Rajasthan, Chhattisgarh, Andhra Pradesh, Bihar, Jharkhand, West Bengal and Kerala have all committed to spend 5-19% of its revenue receipts on populist schemes (in 2023)”, the note added.

Rise in off-balance sheet borrowing may make state budgets a poor tracker of distress in their finance

What might complicate matters in tracking the fiscal health of the states is a growing tendency to resort to more off-balance sheet borrowing. While the number does not show up in state budgets, the debt servicing costs are ultimately borne by the state governments.

A CRISIL Ratings research note dated May 4 shows that the share of off-balance sheet borrowing in the GSDP of 11 states (they account for 75% of aggregate GSDP) increased from 2.6% in 2015-16 to an expected 4.5% in 2021-22. This number was 3.5% in 2019-20. Assuming an average interest rate of 9% and debt tenure of 7-8 years, these repayments are estimated to cost the states around 4-5% of the total estimated revenues in 2023, stated CRISIL Ratings.

Majority of these guarantees belong to state-owned entities with limited cash flows. “The power sector — primarily discoms — account for almost 40% of the outstanding state guarantees. These were taken to repay the dues of power generation and transmission companies with discoms continuing to make cash losses. With most of them expected to continue reporting losses this fiscal as well, due to higher input (mainly coal) costs, states will have to provide higher support for timely servicing of the guaranteed facilities”, said CRISIL Ratings’ Senior Director Anuj Sethi.

 

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Sunday, June 26, 2022