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General government fiscal deficit at 13.3% of GDP in FY21…

…and spending up 17% YoY during the year

* Based on the monthly accounts available for 18 states (together accounting for ~90% of all states), total spending by the states increased 5.5% YoY in FY21, with total receipts falling 5.2% YoY. Therefore, the states’ fiscal deficit rose to INR8t (or 4% of GDP) in FY21 from INR5t (or 2.5% of GDP in FY20).

* States’ total tax receipts (inclusive of devolution from the center) declined 5.5% in FY21, marking the second consecutive fall; this was following a contraction of 4% YoY a year ago. The states’ own taxes fell (by 4%) for the first time in the past three decades. Non-tax receipts (revenue + capital) of all the states also fell 4.5% in FY21 vis-à-vis 20% growth in FY20.

* Within the total expenditure, states’ revenue spending grew 6.3% YoY and capital expenditure (capex) was up just 0.9% YoY in FY21. Notably, after falling more than 20% YoY over Apr–Dec’20, the states’ capex grew 37.4% YoY in 4QFY21, partly supported by a low base and partly by higher receipts.

* On a consolidated level, the total receipts of the general government (center + states) declined 7.4% YoY in FY21, but total spending grew 17.1% YoY. Compared with 5.8% growth in states’ spending, the center’s expenditure grew 30.7% YoY in FY21. Notably, although capex by the general government grew 11.9% YoY in FY21, fiscal investments (excluding loans and outlays) increased just 1.5% YoY last year (vis-à-vis a fall of 0.7% in FY20).

* Consequently, our calculations suggest the combined fiscal deficit of the general government stood at 13.3% of GDP (or INR26.2t) in FY21, against a combined fiscal deficit of 7% of GDP (or INR14.2t) in FY20.

* India’s nominal/real GDP contracted 3%/7.3% in FY21, marking the worst contraction since independence. However, government spending (consumption + investments) rose 6.7%/2% in nominal/real terms in FY21, in contrast with sharp decline of 6.8%/10% in nominal/real terms in private spending last year.

In this note, we analyze the provisional finances of 18 states in FY21, which together account for ~90% of all states. These comprise Andhra Pradesh (AP), Bihar (BH), Chhattisgarh (CT), Gujarat (GJ), Haryana (HR), Himachal Pradesh (HP), Karnataka (KA), Kerala (KL), Madhya Pradesh (MP), Maharashtra (MH), Odisha (OD), Punjab (PB), Rajasthan (RJ), Tamil Nadu (TN), Telangana (TS), Uttar Pradesh (UP), Uttarakhand (UK), and West Bengal (WB).

States’spending grew 5.5% YoY, but receipts fell for the first time in FY21: Based on the provisional data of 18 states, our calculations suggest the total spending by the states grew 5.8% in FY21, following growth of 3% in FY20 – the slowest in three decades. Notably, states’ spending growth has been below 6% three times in the last four years (and averaged 7% since FY18), vis-à-vis the pre-GST lowest growth of 7.2% in FY02 (Exhibit 1).

States’ total receipts, on the other hand, declined 5.2% in FY21, marking the first fall in at least the past three decades. Against average growth of 14% in state receipts since FY91, the states have posted average growth of just 6% since FY18, primarily due to growth of just 2.5% in FY20 and the first decline seen last year.

States’ fiscal deficit was at a 17-year high of 4% of GDP in FY21: Due to the combination of decline in receipts and growth in spending, states’ aggregate fiscal deficit rose to INR8t (or 4% of GDP) in FY21, up from INR5t (2.5% of GDP) in FY20 (Exhibit 2).

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