Elections, crop loan waivers and flood relief may see states trip on fiscal consolidation in FY19: ICRA

The Reserve Bank of India (RBI) has highlighted that the fiscal deficit of all 29 Indian states would decline to 2.6 per cent of gross domestic product (GDP) as per their FY2019 Budget Estimates (BE), from 3.1 per cent of GDP as per their FY2018 Revised Estimates (RE).

By Joe C Mathew  
Tuesday, September 11, 2018

Rating agency ICRA has expressed doubts over the states' ability to tread the budgeted fiscal consolidation path during the current financial year (FY2019). Funding of crop loan waivers, election-related spending and flood relief are some of the expenditures that may result in states overshooting their budgeted expenditure, ICRA points out. However, the adverse impact will be minimized if the states are able to generate higher-than-budgeted revenues because of the recent amendments related to IGST and GST compensation cess, and a back-ended pickup in headline SGST collections, it says.

"A rise in revenue expenditure beyond the budgeted levels, led by the funding of crop loan waivers, election-related spending and flood relief, may lead to fiscal slippage for some of the states, unless their capital spending is curtailed below, and/or their revenue receipts are enhanced above the level budgeted for FY2019," Jayanta Roy, Group Head - Corporate Sector Rating, ICRA states.

The Reserve Bank of India (RBI) has highlighted that the fiscal deficit of all 29 Indian states would decline to 2.6 per cent of gross domestic product (GDP) as per their FY2019 Budget Estimates (BE), from 3.1 per cent of GDP as per their FY2018 Revised Estimates (RE). ICRA's in-depth study of the FY2019 budgets of nine states, accounting for approximately 62 per cent of the combined gross state domestic product (GSDP) of all 29 states (in FY2017), estimates that their fiscal deficit is budgeted to decline to 2.5 per cent of GSDP in FY2019 BE from 2.6 per cent of GSDP in FY2018 RE.

Roy says that a reduction in the capital spending would be an unfavourable outcome, which may impair the quality of expenditure.

According to ICRA, with legislative elections likely to be held in FY2019 and FY2020 in three out of the nine states in the sample (and in 12 out of the total 29 Indian states), there is a risk of announcement of new schemes or an increase in the allocation of the existing welfare-oriented schemes, in line with the trend observed of late. Furthermore, unforeseen expenditure on flood relief in states such as Kerala and Karnataka, which may not be fully offset by higher grants or other revenue mobilisation measures, could exert pressure on their fiscal balances.

So far in FY2019, the amount required to be released to the states as GST compensation has been limited to Rs. 3,900 crore for April-May 2018 and Rs. 14,930 crore for June-July 2018. Additionally, the amount collected as GST compensation cess has exceeded the compensation funds released to the states.

"As per the GST (Compensation to States) Amendment Bill, 2018, 50 per cent of the unutilised amount lying in the Compensation Fund at any point in a financial year during the transition period, shall be distributed amongst the states. Moreover, the recently passed IGST (Amendment) Bill, 2018 provides that any unsettled amount of IGST shall be divided equally between the Centre and the states. These changes are likely to ease the cash flows of the state governments and boost their revenues, thereby aiding their fiscal consolidation efforts," Roy said.

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