State govts' fiscal gap to remain elevated in FY18: HSBC

Foreign brokerage HSBC today said despite financial support from the Centre, Indian state governments' fiscal deficit widened more than budgeted and the gap will remain at the elevated level in 2017-18.
"Our study of 16 budget documents shows that India's states, on aggregate, overshot the fiscal deficit target as expenditures soared," its chief India economist Pranjul Bhandari said.
She said this has happened despite an increased revenue transfer to the states from the Centre, which offset the dip in stamp duty and value added tax collections.
In a note, the brokerage said that the entire increase came from higher current spending, while capex in fact fell.

The states have not accounted for many pressures on the horizon and factors like hike in salaries due to 7th pay commission award, interest bill on the power sector's UDAY bonds, and election-related spending could add to fiscal pressures in the states.
The fiscal deficit for the states is expected to continue to remain at elevated level of 2.8 per cent for the fiscal year 2017-18.

However, the Centre's prudent stance will help moderate the overall public sector borrowing in FY18 despite the states' elevated fiscal deficit, it said.
Comforting factors which can ease the pressures can be higher stamp duty collections on the back of a stabilising housing sector and higher oil VAT on rising oil prices, it said.

"We worry that the centre may not come to the states' rescue ad infinitum," it said.
It said the spreads on state development loans are sensitive to such behaviour.
"If the states do not gradually lower their deficits over time, the benefits of falling central borrowings can be offset by the rising share of SDL. And higher spreads could keep the state interest bill elevated," it said.