Ind-Ra: A Socioeconomic & Fiscal Anatomy of States

With economic and political contours changing, the states in India are now enjoying more autonomy with regard to deciding their future course of development and policy mix/financing options. Although the broad policy framework remains the same, significant variations exist across the states on growth, development and fiscal performance. For instance, although states such as Gujarat, West Bengal and Karnataka have registered higher GSDP growth than the national average, their social and/or physical infrastructure lags behind that of states such as Kerala, Punjab, Tamil Nadu and Maharashtra.

Similarly states such as Assam, Himachal Pradesh and Rajasthan are fiscally stressed, but are not facing liquidity issues. Meanwhile, with a comparatively low fiscal deficit, states such as Punjab, Kerala and West Bengal are experiencing serious liquidity issues and are frequently tapping the ways and means advances window of the Reserve Bank of India. Also, state development loan (SDL) is now the dominant source of deficit financing for states compared with loan from the centre and small savings funds around a decade ago.

Given the information asymmetry, and significant performance and outcome variations across the states, developing a meaningful, comprehensive and comparative understanding of the states in India is an arduous task. India Ratings and Research (Ind-Ra) has prepared a comprehensive report that analyses and ranks the 20 major states based on their economic and fiscal performance and the level of social, physical and banking infrastructure during the period FY12-FY17.

In addition, the study provides an analysis on the states' fiscal reforms-related aspects such as the status of the states' consolidated sinking fund, guarantee redemption fund and overall guarantee position. It also provides a state-level heat maps showing 35 indicators and the fiscal outlook for each state for the next five years.

On the fiscal front, the states' aggregate position improved during FY12-FY16, led by states such as Odisha, Chhattisgarh, Maharashtra and Gujarat. On the other hand, the fiscal positions of Assam, Rajasthan, Kerala, Bihar and Himachal Pradesh remained weak during the period. A high level of committed expenditure (in the form of salaries, pensions and interest payments) emerges as a key reason behind state-level fiscal stress. Moreover, the rigid nature of committed expenditure limits the states' ability to augment expenditure towards education, health, roads, transport infrastructure and other development areas.

In terms of market borrowings, the states' expansionary fiscal policies and increased reliance on market borrowings following the 2008 global financial crisis led to higher redemption pressure beginning FY18. The aggregate SDL redemption of the states in FY18 was 1.9x of that in FY17. The SDL redemption is significantly higher for select states: West Bengal - 3.6x, Andhra Pradesh - 3.0x, Punjab - 2.8x and Maharashtra - 2.4x. With regard to Tamil Nadu, Telangana and Andhra Pradesh, SDLs constitute 71.0%-81.0% of their total liabilities. However, this proportion is below 40.0% for Odisha, Rajasthan, Uttar Pradesh and Assam.

Ind-Ra expects the aggregate fiscal deficit of states to marginally increase to 3.1% of GDP in FY19 (FY18: 3.0%). In addition, the agency expects the states' resilient revenue position to keep their overall finances stable, despite the states' vulnerability to potential populist policies against the backdrop of upcoming state and general elections.

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