After Fiscal Slippage In FY19, States Aim To Consolidate Next Year

Ten of nineteen large states overshot their fiscal deficit projections in 2018-19 putting the cumulative budget gap at just under 3.3 percent of gross state domestic product, shows data compiled by SBI Economic Research. Most of these states are targeting a narrowing of the fiscal deficit in 2019-20, shows the data.

The revised fiscal deficit as a percentage of GSDP is estimated at 3.26 percent for 2018-19 and is seen dropping to 2.85 percent in the coming financial year, SBI Economic Research highlighted.

“This comes on the back of increased overall estimates of GST collections (growth rate: 18.8 percent ) and reduced revenue expenditure (growth rate: 7.6 percent), which looks slightly ambitious,” said Soumya Kanti Ghosh, chief economist at SBI. A lower level of capital expenditures is also visible in some states, he added.

The fiscal consolidation targeted by these states is significantly more than the central government, which, in its interim budget, had projected a fiscal deficit of 3.4 percent of GDP for 2019-20, unchanged from the year concluding March 31, 2019.

As many as 10 states are targeting a fiscal deficit of less than 3 percent next year, the data shows.

All the states have projected a decline in fiscal deficit next year, except Odisha, Assam and Uttarakhand. Despite the increase, these three states are keeping the fiscal deficit below 3 percent.

As per the Fiscal Responsibility and Budget Management Act, states are required to bring down their deficit to 3 percent of GDP. The center, too, was supposed to meet that target but has pushed it back to 2021-22. Some believe that states have done a better job in fiscal consolidation that the center. “It can be said that if states are bad, then the center is worse,” said former RBI governor YV Reddy in an interview on the launch of his book ‘Indian Fiscal Federalism.’

Analysing past trends in state fiscal deficits, Ghosh pointed out a peculiar trend. While revised fiscal deficit projections often show wider than projected gaps, the actual fiscal deficit released a year later is in line with original budget projections.

“A closer look at the budgeted fiscal deficit numbers for FY18 and revised numbers shows a steep jump in revised (fiscal deficit). However, the actuals are largely in consonance with budgeted numbers for most of the states barring West Bengal,” wrote Ghosh. One reason for this could be course correction in actual expenditure to match any shortfall in revenue.

This trend of a match between actual deficits and budgeted deficits, with an intervening spike in the revised deficit can be misleading for the markets.