Farm schemes to push state fiscal deficits to 3.2% of GDP in FY'20: Ind-Ra

In the current financial year, states are expected to witness a fiscal slippage of 0.2 percentage points to 2.8% of GDP in 2018-19

With competitive populism taking the centre stage in the run-up to the upcoming general elections, the combined deficit of all states are likely to rise to 3.2 per cent of GDP in 2019-20, up from the budgeted target of 2.6 per cent in 2018-19, says India Ratings and Research (Ind-Ra). 

In the current financial year, states are expected to witness a fiscal slippage of 0.2 percentage points to 2.8 per cent of GDP in 2018-19, the rating agency noted in its FY20 outlook. 

Over the past few years, several states have announced farm loan waivers to assuage the growing distress in rural areas. 

In 2018 alone, the states of Madhya Pradesh, Chhattisgarh, Assam and Rajasthan announced farm loan waivers. Further, Odisha and Jharkhand have also announced income support schemes for small and marginal farmers.

These measures are likely to increase the combined revenue expenditure of all states by 18.9 per cent to Rs 33.28 trillion in FY20. By comparison, states had budgeted their revenue expenditure to grow by 10.5 per cent to Rs 27.83 trillion in FY19, from Rs 25.18 trillion in FY18, according to the Reserve Bank of India (RBI) study on state budgets. 

The combined revenue deficit of states is likely to deteriorate further to 0.5 per cent of GDP in FY20, up from the budgeted target of 0.2 per cent in FY19, notes the study. This suggests that states are now borrowing to fund revenue expenditure rather than capital expenditure. 

On the capex side, according to the study, the combined expenditure of all states is expected to be around Rs 6.3 trillion in FY20, up from Rs 5.75 trillion in FY19 (BE). This amounts to roughly 3 per cent of GDP.

By comparison, the centre’s capital expenditure was budgeted at Rs 3 trillion in FY19 or 1.59 per cent of GDP. 

With gross borrowing of states expected to rise to Rs 5.7 trillion in FY20, up from Rs 5.01 to 5.13 trillion in FY19, Ind-Ra expects the aggregate debt to GDP ratio of states to rise to 25.1 per cent of GDP in FY20, marginally higher than 24.3 per cent in FY19.

By comparison, the committee to review the fiscal responsibility and budget management act, headed by NK Singh had suggested that states cut their fiscal deficit by 0.16 per cent of GDP each year to bring it down to 21.02 per cent of GDP by FY25.