States Likely To Narrow Fiscal Deficit In 2019-20, Says Yes Bank

The states that doled out farm loan waivers saw their fiscal deficit widen in the revised estimates for 2018-19 from the initial budget forecasts. But, according to Yes Bank’s assessment, deficit indicators are expected to improve in the ongoing financial year.

The aggregate fiscal deficit ratio as a proportion of the state GDP is set to improve 40 basis points to 2.5 percent in 2019-20 compared with the revised estimates of FY19, according to a Yes Bank report. Similarly, aggregate revenue surplus as a percentage of the state GDP is expected to rise 10 basis points to 0.1 percent from nil in the previous year.

With the exception of three states, fiscal consolidation at the state level is expected to improve along with an improvement in their fiscal deficit ratio, Yes Bank said.

The Fiscal Responsibility and Budget Management Act has capped the fiscal deficit level at 3 percent but seven states had breached the level in their respective budgets for 2018-19. However, this time, only Punjab will surpass the mandated level —for the second consecutive time—and has budgeted a deficit of 3.4 percent.

The budget documents show that states’ revenue and expenditure growth is estimated to be lower than the previous fiscal. A faster pace of growth in revenue compared to growth in expenditure, however, will lead to improvement in deficit indicators in the ongoing fiscal.

The report notes that at an aggregate level, total expenditure in 17 states is budgeted to grow at 8 percent—which compares to a 33 percent growth in the previous year’s revised estimates—due to a slowing growth in capital and revenue expenditure.

States have capped their overall capital expenditure at 6.4 percent of the total budget estimate in FY20. That stood at 40.6 percent in FY19 because of farm loan waivers, according to the report. After Uttar Pradesh pardoned loans worth Rs 36,000 crore in 2017-18, states like Karnataka, Maharashtra and Punjab and Rajasthan followed suit to ease farm distress. Madhya Pradesh, Assam, and Chhattisgarh allocated a combined total of Rs 55,600 crore to debt waiver.

The sector-specific focus on capital expenditure of state governments is similar to the union budget’s allocation. The report revealed that it remains on irrigation with a 22.2 percent share of aggregate capex, followed by transportation, rural development, and energy.

Failure Of UDAY Scheme

State-run electricity distribution companies reported financial losses of Rs 2,170 crore at the end of fiscal 2019. This reversed the declining trend that was witnessed since the launch of the government’s UDAY scheme in 2015 for the financial turnaround and revival of discoms.

The debt burden of discoms increased as many state power distributors failed to meet their aggregate technical and commercial loss reduction targets, Yes Bank report said. The general election also led to a delay in tariff hikes, leading to an increased debt burden. The combination of UDAY bonds, farm loan waivers, and income support schemes have led to a fiscal slippage in half of the states under analysis for the revised budget of 2018-19.

For now, increase in the interest costs due to Uday bonds is the principal power-sector liability for the states. But unless discoms manage to turn around, their losses would turn out to be burdensome over time, the report said.