Published on 14/02/2020 9:19:30 AM | Source: Motilal Oswal Services Ltd

3QFY20 spending grows despite first decline in receipts - Motilal Oswal

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3QFY20 spending grows despite first decline in receipts

Fiscal spending growth in 4QFY20 would be worse

* Based on the monthly data available for 18 major states (accounting for ~90% of all states), we note that their fiscal deficit was at 57.2% of budget estimates (BEs) in 9MFY20, much higher than 48.8% in the corresponding period last year. While tax receipts grew at decadal low of only 1.0% YoY, states’ spending grew 9.1% during the same period. Within total spending, revenue spending was up 10.4% YoY while capital spending declined 0.4% YoY in 9MFY20.

* States’ tax receipts marked its first decline (of 1.6% YoY) in almost 8 years in 3QFY20. Total receipts, however, grew at a respectable 7.2% YoY in 3QFY20 (lower than 12.5% in 2QFY20), primarily supported by ~80% growth in grants-in-aid from the central government. Total receipts, thus, increased at 9-year low of 6.1% YoY in 9MFY20 and accounted for 59.3% of BEs – the lowest in 5 years.

* States’ total spending, however, grew at a slower pace of 9.4% YoY in 3QFY20, compared to 11-quarter high growth of 16.6% in 2QFY20. Within total spending, while capital spending declined 7.5% YoY in 3QFY20, revenue expenditure grew at 12.5% during the quarter. So far (Apr-Dec’19), the states have spent 59% of their budgeted expenditure for FY20.

* Combining the center and states’ finances, total tax receipts declined 8.2% and total receipts shrank 4.5% in 3QFY20, marking the first contraction in at least the past 8 years. On the other hand, total spending maintained decent growth of 13.2% during the quarter.

* As discussed earlier, government spending has been a key supporter of economic growth in the past many years. However, unrealistic tax assumptions imply that spending cuts are inevitable in 4QFY20 – same as in the past two years. Although the central government has reduced its receipts by INR1.5t in FY20 RE (revised estimates), we believe that there could still be a shortfall of INR900b this year. Further, since the center has revised down the devolution to states by as much as INR1.5t in FY20, states will definitely feel the heat in 4QFY20. Since the center has guaranteed ~14% growth in tax collection for states till 2021-22, the former will have to bear a larger burden of the economic slowdown. In all certainty, thus, fiscal spending growth should be much lower in 4QFY20.

In this note, we assess the finances of 18 state governments – Andhra Pradesh (AP), Chhattisgarh (CT), Gujarat (GJ), Haryana (HR), Himachal Pradesh (HP), Jharkhand (JH), Karnataka (KA), Kerala (KL), Madhya Pradesh (MP), Maharashtra (MH), Odisha (OD), Punjab (PB), Rajasthan (RJ), Telangana (TS), Tamil Nadu (TN), Uttar Pradesh (UP), Uttarakhand (UK) and West Bengal (WB).


Fiscal deficit of states at 3-year high in Apr-Dec’19…:

Fiscal deficit of 18 states reached 57.2% of BEs during Apr-Dec’19, the highest in 3 years and second highest in 10 years (Exhibit 1). Moreover, fiscal deficit of the center reached 132.4% of BEs during the corresponding months. Consequently, for the first time in a decade, aggregate fiscal deficit of the general government (center + 18 states) breached the full-year target by 3.7% of BEs during the first 9 months of FY20 itself (Exhibit 2).


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