The Economy Observer : Combined fiscal deficit at 56.5% of BEs in 9MFY25 - highest in four years by Motilal Oswal Financial Services Ltd
Combined fiscal deficit at 56.5% of BEs in 9MFY25 – highest in four years
Fiscal spending up 9% YoY in 9MFY25 with lower capex
* Based on the provisional data of 20 states, total receipts of all the states grew 12% YoY in 3QFY25, slower than 15.8% growth in 2QFY25 but higher than 7.2% growth in 3QFY24. It implies that the states’ total receipts grew 8.6% YoY in 9MFY25 (vs. +7.7% in 9MFY24), achieving 61.7% of BEs, similar to the corresponding period last year. On the other hand, their total spending grew at a nine-quarter high pace of 14.3% YoY in 3QFY25, following 9.5% YoY growth in 2Q and 10.4% YoY in 3QFY24. It implies that the states’ total spending grew 10.1% YoY in 9MFY25 (vs. +11.9% in 9MFY24), achieving 60.7% of BEs, the highest in at least a decade.
* Consequently, the states’ aggregate fiscal deficit stood at INR1.9t in 3QFY25, much lower than INR2.9t in 2QFY25 but higher than INR1.4t in 3QFY24. It, thus, stood at 2.2% of GDP in 3QFY25, up from 1.9% in 3QFY24. The aggregate fiscal deficit was INR5.8t (or 2.5% of GDP) in 9MFY25, compared to INR4.9t (or 2.3% of GDP) in 9MFY24. States have achieved 56.2% of their full-year target in 9MFY25, higher than 52.1% of BEs in 9MFY24 and the highest in three years.
* An analysis of individual states/UTs suggests that only two states (OD and JK) posted a fiscal deficit of 10% of BEs or less in 9MFY25 compared to four states (JH, GJ, MH and JK) in 9MFY24. Notably, AP’s 9MFY25 fiscal deficit exceeded its fullyear target – AP’s fiscal deficit was 107.0% of full-year BEs in 9MFY25 (lower than 127.7% of BEs in 9MFY24). Besides AP, seven other states (TS, PB, KL, RJ, HP, HR, and UK) recorded a fiscal deficit of more than 70% of BEs in 9MFY25 compared to three (AS, PB, and KL) in 9MFY24.
* Within states’ total receipts, their own receipts grew at a three-quarter high rate of 8.3% YoY in 3QFY25 (3.7%/10.0% in 2QFY25/3QFY24), implying a growth of 6.7% YoY in 9MFY25 vs. a growth of 10.9% in 9MFY24. At the same time, the Center’s transfer to states (devolution + grants) increased 17.2% YoY in 3QFY25 (39.4%/3.5% in 2QFY25/3QFY24), implying a growth of 11.5% YoY in 9MFY25 vs. a growth of 3.2% in 9MFY24 (Exhibit 7). Thus, states’ total receipts grew 8.6% YoY in 9MFY25, mainly driven by transfers from the Center.
* Within states’ spending, growth in revenue spending outpaced growth in capital spending for the third consecutive quarter in 3QFY25. Revenue spending grew 16.4% YoY in 3QFY25, the highest growth in 21 quarters, compared to a growth of 9.5% in 3QFY24. Capital spending (including L&As) grew 3.3% YoY, following 15.2% growth in 3QFY24 (Exhibit 9). Excluding L&As, capex (or capital outlays) of all states grew 6.4% YoY in 3QFY25 (vs. 18.5% in 3QFY24) after declining for two straight quarters. Overall, the states’ capex was down 3.2% YoY in 9MFY25, following a growth of 32.1% in 9MFY24, and stood at 47% of BEs in 9MFY25.
* A combined analysis of the central and state governments confirms that total receipts grew 9.1% YoY (11.5% in 9MFY25) and total spending grew at a five-quarter high pace of 17.6% in 3QFY25 (9.0% in 9MFY25). Further, revenue spending grew 15.7% YoY in 3QFY25 (highest in five quarters), following a growth of 1.9% in 3QFY24 (11.0% in 9MFY25). On the other hand, combined capital spending surged 26% YoY in 3QFY25, following a growth of 19.7% in 3QFY24 (0.5% in 9MFY25). The combined capex (excluding L&As) contracted 3.5% YoY in 9MFY25 vs. 35.8% YoY growth in 9MFY24.
* In other words, total receipts stood at 68.6% of BEs in 9MFY25, lower than 70.8% of BEs in 9MFY24. At the same time, total spending was at 65.4% of BEs in 9MFY25, similar to 65.7% of BEs in 9MFY24. Consequently, the combined fiscal deficit was at 56.5% of BEs in 9MFY25, the highest in last four years. Assuming 10% YoY nominal GDP growth in 3QFY25, our calculations suggest that the GG fiscal deficit stood at 6.3% of GDP in 9MFY25, lower than 6.8% of GDP in 9MFY24 and the average of 7.0% of GDP in the past decade (excluding FY21).
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