States fiscal deficits for FY24 likely to be close to 3.1% of GDP: Citi

The report suggests grants from Centre to states have been falling due to no GST compensation funds and lower finance commission grants

The actual fiscal deficit of states for the financial year 2023-24 (FY24) is expected to be closer to the original budgeted estimate of 3.1 per cent of the Gross Domestic Product (GDP) instead of the revised estimate of 3.5 per cent, with both revenue and expenditure showing a lower growth than estimated, an analysis of 22 state Budgets by Citi Research showed. 

According to Citi Research’s report titled ‘India Economics, State Finances: A Tale of Capex, Grants and Borrowings’, this indicates that “overall, the states are within their borrowing limits.”

“However, at least 6 of the 22 states that we tracked have budgeted for a fiscal deficit higher than 3.5 per cent in FY25,” it said. 

The report suggested that grants from the Centre to states were falling due to no GST compensation funds and lower finance commission grants. Due to this, grants from the Centre which accounted for 18-19 per cent of total state revenues, could fall to 15 per cent for FY24-FY26, the report said. 

Besides, of the total Rs 2.95 trillion granted to states in the FY22-FY26 period by the Finance Commission, 87 per cent was already distributed in FY22-FY24. Grants would be substantially lower for the FY25-FY26 period, the report said.

“Overall, lower grants are likely to weigh down states’ total revenue growth in FY25 and may even be a headwind for FY26,” it said.

Finance Commission grants are a key component of grants from the Centre at about 25 per cent of total grants. Some of these are linked to states meeting certain fiscal parameters, such as states must move into a surplus position in their revenue balance. 

“States have still not moved to a revenue surplus at an aggregate level. We estimate that states have budgeted a revenue deficit of 0.2 per cent of GDP for FY25BE, a reversal of the pre-pandemic trend in FY18 and FY19,” the report said. 

It said the available state data for 11 months of FY24 showed revenue growth of 10.5 per cent and expenditure growth of 11.7 per cent against 17 per cent and 21 per cent in the revised estimate, respectively.

On capital expenditure, Citi Research said it expected the states to fall Rs 500 billion short of meeting their FY24 revised estimate target. 

“Nevertheless, even our FY24 estimate of 2.9 per cent of GDP state capex - including Centre loans is a sharp jump from 2.5 per cent in FY23,” the report said, adding that the state capex for FY24 would be the highest level since FY17 and well above the pre-Covid average of 2.4 per cent.