Budget 2020: Fall In Central Transfers To States A Risk To Growth, Say Economists
Labourers take a break on the Bandra-Worli sea link in Mumbai. (Photographer: Adeel Halim/Bloomberg News)

Budget 2020: Fall In Central Transfers To States A Risk To Growth, Say Economists

India’s Union Budget presentation on Saturday showed a significant decline in the fund transfers to states, which, according to economists, could pose an eventual risk to growth.

Data included in budget documents showed a decline in the revised estimates of transfers to states. While this could be partially due to the lower corporate tax rate announced by the government during the year, the share of tax transfers to states has also declined, said Prachi Mishra, chief India economist at Goldman Sachs, in an interview to BloombergQuint.

These lower transfers were one of the three routes used by the government to keep its own fiscal deficit in check, Mishra said. The other two ways in which the fiscal slippage was curbed include a higher dividend from the RBI and deferred transfer of food subsidies to the Food Corporation of India Ltd.

State transfers are down by Rs 1.6 lakh crore in the revised estimate compared to the budget estimates. As a percentage of gross tax revenues, in typical years it is around 33 percent. In FY20, this percentage is 30 percent. If you go beyond the numbers, this will definitely have an impact on the ground.
Prachi Mishra, Chief India Economist, Goldman Sachs

Also read: Budget 2020: Government Continuing Reform Agenda, Says PM’s Economic Advisory Council

A number of states have been complaining about reduced transfers from the central government, including delays in compensation cess that is to be provided in times when GST revenue growth falls below the guaranteed 14 percent.

While the transfer of compensation cess is reported separately from the ‘Transfers To States’ item in the Union Budget, delays in such transfers have strained state finances in FY20. Unlike the central government, states cannot increase their borrowing unless approved by the centre. As such, a revenue shortfall often leads to reduced spending and deferrals in salary payments at the state level.

The risks emerging from lower state transfers were flagged by Credit Suisse too. Revenue transfer to states dropped by nearly 50 percent of the cut in gross tax receipt assumptions, wrote Neelkanth Mishra and Prateek Singh in their post-budget report.

Speaking to BloombergQuint, Mishra said states are under stress and, unlike the central government, they can’t breach their fiscal targets.

So all of these stories about delayed payments we are hearing may be about states delaying payments rather than central payments. States are such a large part of the fiscal picture. Last two months of this fiscal year are tricky and we will have to pay greater attention to state budgets. 
Neelkanth Mishra, India Strategist, Credit Suisse

Is The Budget Growth Supportive?

Commenting on the broader impact of the budget on the economy, Mishra of Goldman Sachs said the overall spending by the centre, states and central public sector enterprises suggests a ‘positive fiscal impulse’ of 0.8 percentage point in FY20. Even in FY21, despite the government’s decision to bring down the fiscal deficit to 3.5 percent, government spending will rise.

In particular, borrowings by central public sector enterprises rose sharply in the revised estimates of FY20, budget documents showed. According to Goldman Sachs, these borrowings rose to abut 2.3 percent of the GDP in the soon-to-close fiscal.

As such, the support from overall public sector spending could help the economy recover marginally in the months ahead.

For FY20, the consolidated deficit works out to 8.8 percent of GDP. There is an impulse of 0.8 percentage points. That is a substantial impulse which should be positive for the economy. Since these things work with a lag, this should help the economy in FY21.
Prachi Mishra, Chief India Economist, Goldman Sachs

Incoming data suggested some stablility in the economy. The Purchasing Managers’ Index rose from 52.7 in December to 55.3 in January, its highest level in just under eight years. Goldman’s proprietary leading economic indicators index also suggests some stability in the economy.

Also read: Budget 2020: Tax Goals Realistic, Says Credit Suisse’s Neelkanth Mishra 

The Economic Survey pegged growth in FY21 at 6-6.5 percent. Mishra, too, believes that a pick up of about 1 percentage point in GDP growth in FY21 is possible.

Watch the full interview with Goldman Sachs’ Chief India Economist Prachi Mishra below:

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