Published on 17/10/2019 11:00:45 AM | Source: Motilal Oswal Ltd

States` finances remain constrained By Motilal Oswal

Posted in Expert Views| #Economy #Expert Views #Motilal Oswal

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States’ finances remain constrained

Despite better Aug’19, progress in FY20 disappointing

*  An analysis of the monthly finances of 17 state governments (fiscal numbers published up to Aug’19) reveals the continuation of a worrying trend. Total receipts of 17 states grew only 4.1% YoY in the first five months of FY20 (AprAug’19) despite ~26% YoY growth registered in Aug’19. Total spending of 17 states also grew ~16% YoY in Aug’19; capital expenditure (excluding loans & advances), a component of total spending, posted its first growth (strong 24.4% YoY) in four months. For the first five months of FY20, while capital expenditure grew only 0.6% YoY, core revenue spending (excl. interest payments) grew 7.6% YoY. Thus, total spending of states grew at nine-year low of 5.8% in Apr-Aug’19.

*  As a percentage of budget estimates (BEs), states’ total/tax receipts were at a decadal low of 31.5%/33.0% in Apr-Aug’19. Consequently, total spending of states was only 31% of BEs – the lowest in five years – with capital expenditure/core revenue spending at only 23.0%/33.6% of BEs. Combined fiscal deficit of states in the first five months, however, stood at 28.2% of BEs, higher than 26.6% in the corresponding period a year ago.

*  The recent release of the RBI’s study of state finances (2019-20), confirms that states’ fiscal deficit in FY18 was 2.4% of GDP, lower than the revised estimate (RE) of 3.1%, which is in line with our study of states finances as well. Although the states’ targeted deficit was 2.9% in FY19, the actual, we believe, was lower at 2.5% of GDP, reflected in lower-thanbudgeted borrowings. Overall, weak receipts have constrained states’ capacity to meet their spending targets with tight financial markets also restraining their ability to borrow excessively. We, therefore, expect FY20 to replicate FY18/ FY19.

In this note, we have analyzed the finances of 17 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) and West Bengal (WB). Together, these states account for more than ~84% of total receipts of all states and ~85% of all states’ budgets.

States’ finances improve in Aug’19…:

Total taxes collected by 17 states grew 15.8% YoY in Aug’19, marking its fastest growth in eight months (Exhibit 1). In fact, states’ taxes have been volatile in FY20; taxes declined for the first time in 14 months in May’19 (-10.6%), then grew slightly in Jun’19 (+3.6%) before declining sharply again in Jul’19 (-12.1%). Accordingly, total spending posted its second consecutive doubledigit growth in Aug’19, after successive declines in May-Jun’19 (Exhibit 2).


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