State finances are showing signs of increasing fiscal imbalance

Fiscal deficit aggregates fell from 1.93% in 2011-12 to 3.03% in 2015-16

Finances of state governments are showing signs of increasing fiscal imbalance, though the Centre’s books have shown a degree of consolidation.

A paper by the National Institute of Public Finance and Policy (NIPFP) said if trends of all state finances were considered, it appeared that their fiscal deficit has started increasing in the recent years.

Fiscal deficit aggregated across the states deteriorated as a percentage of GDP from 1.93 per cent in 2011-12 to 3.03 per cent in 2015-16. It was budgeted to further decline to 3.67 per cent in 2016-17. As such, the deficit breached the ceiling of 3 per cent for the first time since 2004-05. 

High fiscal deficit in 2015-16 and 2016-17 (RE) was on account of state governments taking over 75 per cent of power distribution companies’ debts, in a scheme called UDAY. If UDAY liabilities were excluded, the fiscal deficit-GDP ratio would be around 2.31 in 2015-16 and 3.32 in 2016-17 (RE).

Besides, the number of states with fiscal deficit greater than three per cent increased from nine in 2011-12 to 14 in 2014-15 and to 19 in 2016-17 (RE).

In 2017-18, fiscal deficit of all states as a percentage of GDP was budgeted to be around 2.69 per cent and 11 states have budgeted for the deficit to be greater than 3 percent of their respective state GDP.