States' fiscal health to deteriorate further in FY18: Report

Centre's deficit has narrowed from 6.5% of the GDP in 2009-10 to 3.5% in 2016-17

Even as the Central finances have improved over the years, the average fiscal deficit for the states has widened to over three per cent of the gross state domestic product in fiscal 2017 and is likely to stay wide in 2017-18 as well, says a report.

The Centre's deficit has narrowed from 6.5 per cent of the GDP in 2009-10 to 3.5 per cent in 2016-17. It is projected at 3.2 per cent in 2017-18, DBS said in a report on Wednesday.

But the finances of the states have turned unfavourable in recent years with the aggregate states' fiscal deficit widening from two per cent of GSDP (gross state domestic product) in 2011-12 to over three per cent in 2016 -17, it said.

"These deficits may stay wide in 2017-18 as well, keeping borrowings high and delaying consolidation plans," the Singaporean brokerage said.

Strong nominal growth, better tax collections following the introduction of value-added tax, lower interest payments and shifting some spending to the Centre's books had helped keep deficits of the states under control in the past.

Findings by DBS, however, show that these trends have weakened more recently.

"States' spending commitments have risen while revenues stagnate. The bulk of this is due to higher revenue expenditure (recurring/committed expenses) which makes up 80 per cent of total spending, narrowing the room for capital/ productive expenditure.

Consequently, the revenue-to-capital ratio has also ticked up," it added.

The brokerage estimates the revenue expenditure "to stay sticky" in the current fiscal attributed to, among others, the interest burden from a funding scheme for distressed power distribution companies (UDAY initiative) as well as the recent decision to waive farm loans.

"The new Uttar Pradesh government was the first to outline such a farm waiver last month and could cost the exchequer an estimated Rs 360 billion (2.5 per cent of UP 2017-18 GSDP) this year. If more states jump into the bandwagon, revenue spending is likely to accordingly rise further and widen states deficits," the report said.

The report also noted that revenue generation of the states has been trailing primarily due to moderate growth from sales taxes and excise duties in recent years.