States not on fiscal consolidation path: Nomura

Nomura says Chhattisgarh, Gujarat and Madhya Pradesh are 'better-managed states' while West Bengal, Kerala and Punjab rank the lowest

Despite higher transfers from the Centre, states are deviating from the path of fiscal consolidation, says a report by Nomura. It argues while the fiscal stance of central and state governments will be expansionary, additional resources available to states aren’t being used to increase capital expenditure.

The report ranks states based on five fiscal parameters — fiscal and revenue deficit, share of own taxes in revenue receipts, share of capital expenditure and interest payments. While Chhattisgarh, Gujarat and Madhya Pradesh are “better-managed states”, West Bengal, Kerala and Punjab rank the lowest.

Based on the recommendations of the 14th Finance Commission, states’ share of central taxes will increase from 32 per cent to 42 per cent. While the central government has offset this by lowering grants to states, Nomura estimates net cash transfers to states is still positive.

Additionally, the recently held coal block auctions will result in greater transfer to mineral-rich states such as Chhattisgarh, Jharkhand and Madhya Pradesh, the report says.

But despite the increase in transfers, there is little consolidation at the level of states. Nomura estimates the aggregate fiscal deficit of 16 states in FY16 at 1.7 per cent of gross domestic product (GDP), marginally higher than the FY15 Budget estimate of 1.6 per cent but lower than the revised estimate of 1.9 per cent.

The report estimates the cyclically-adjusted fiscal deficit of the Centre and 16 states will deteriorate from 5.9 per cent of GDP in FY15 to 6.2 per cent in FY16. This, it points out, “will lead to a positive fiscal impulse of 0.3-0.4 percentage points, after three consecutive years of a negative fiscal impulse, which is positive for growth”.

The quality of spending is similar to past years, with total capital expenditure budgeted to remain “largely unchanged” at 2.1 per cent of GDP in FY16, against two per cent in FY15, the report says.

It points to a gap between what the Centre estimates it transfers to states and what states estimate they get from the Centre. For the 16 states, this figure is estimated at Rs 42,510 crore. The report says a part of this could be used to address losses at state distribution companies or pay compensation to farmers.