Managing State Finances: Maharashtra Fears A Spurt In Fiscal Deficit In FY20
Tourists visit the Gateway of India arch-monument in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Managing State Finances: Maharashtra Fears A Spurt In Fiscal Deficit In FY20

The western Indian state of Maharashtra—India’s largest in terms of gross state domestic product—is expecting its fiscal deficit to hit the threshold of 3 percent in the ongoing financial year amid a slowdown in tax revenue.

The predicament faced by Maharashtra is mirrored across a number of states leading to concerns that along with the central government, states, too, will see a shortfall in revenue and an expansion in fiscal deficit. India Ratings and Research, in a note on Tuesday, said that it expects the combined fiscal deficit of states to hit 3 percent in FY20 compared to the budgeted figure of 2.6 percent.

This, together with an expected slippage in the centre’s fiscal deficit target of 3.3 percent of GDP, could take India’s general government deficit closer to 7 percent.

In Maharashtra, the fiscal deficit may settle at close to 3 percent as opposed to the 2 percent deficit targeted when the FY20 budget was presented by the previous Bharatiya Janata Party government.

“Our fiscal deficit is almost touching 3 percent,” Jayant Patil, who holds charge of the finance ministry in the newly appointed government in Maharashtra, told BloombergQuint in an interview on Dec. 23. The state’s revenue deficit is sizeable too, Patil said.

Wider deficit is a consequence of lower revenue amid growth in gross state domestic product.

According to Patil, the state will not meet its growth estimates. Like the central government, states, too, had budgeted for nominal growth of 11 percent. Actual nominal growth in the first half of the year has been just 7 percent, with states seeing far weaker economic expansion compared to what was anticipated. If Maharashtra is not growing at the 7.5-8 percent expected, it will impact the country, too, Patil said.

With many businesses seeing a decline in sales, state collections for the goods and services tax have been weak, Patil said. “We have asked for Rs 8,600 crore in compensation for the last four months (till October). Of that, about Rs 4,400 crore has come,” said Patil, adding that the GST collections have been better in November.

Data released by the central government on Jan. 1 showed that GST collections for November stood at Rs 1.03 lakh crore. Data for individual states, released by the government, showed that Maharashtra had collected Rs 16,530 crore in November, a 22 percent increase over last year.

For the full year, according to India Ratings, Maharashtra is among 12 states that had not budgeted for compensation from the government in FY20 but may need such transfers. Overall, India Ratings expects the shortfall on account of state GST collections in FY20 could be Rs 1.66 lakh crore.

Self-Inflicted Spending Pain

Not all of the financial difficulties that states are facing are brought on by the slowdown. Over the last two years, a number of states have seen a build-up in expenses on two counts — continuing losses at state electricity boards and farm loan waivers. For Maharashtra, the latter has been a continued burden on the state exchequer.

Among the first policy announcements made by the newly appointed Shiv Sena-led government was a farm loan waiver for short-term crop loans up to Rs 2 lakh. This came atop an extended farm loan waiver scheme put in place by the previous BJP government.

Patil acknowledged that loan waivers will add to spending pressures amid a slowdown, but said the relief was essential for the state’s farmers. He declined to say how much the state will spend on the proposed waiver but said the expenditure will reflect in the next year’s budget.

“We have no other option because farmers of Maharashtra have suffered a lot in the last five years... In almost 33 districts, more than 23,000 villages have been affected. Farmers tilling more than 94 hectares of land have been affected,” Patil said. He explained that the heavy rainfall in July-August and untimely rainfall of September-October have impacted the state’s farm sector. The state has also sought help from the central government, Patil said.

According to the Reserve Bank of India, since 2014-15, 10 states have announced loan waiver programmes of an aggregate amount of Rs 2.3 lakh crore, or 1.4 percent of GDP. Maharashtra spent over Rs 21,000 crore on such loan waivers until FY19 — the highest after Uttar Pradesh and Karnataka.

To be sure, Maharashtra’s capacity to absorb increased expenses is stronger than most other states. The state’s total liabilities stood at 16.6 percent of gross state domestic product at the end of FY19 — the lowest across the country.

Compromising Capital Expenditure

Still, the increased revenue expenditure amid a revenue slowdown will force states to prune capital spending, which, in turn, will hurt the economy.

Definitely, the slowdown and expenditure on schemes such as the loan waiver will impact capital expenditure, said Patil, adding that capital expenditure had also slipped under the previous state government. “Capital expenditure increase will definitely help the economy in the long term but the loan waiver scheme was important and it was also a commitment made during the elections,” he said.

States have cut back sharply on capital expenditure to keep their fiscal deficits in check, the RBI said in its latest report on state finances. This, the RBI cautioned, has “potentially adverse implications for the pace and quality of economic development, given the large welfare effects of a much wider interface with the lives of people at the federal level”.

Fiscal consolidation and pressures to increase current spending have led to an overall decline in capital spending to the tune of about 0.3 to 0.5 percent of GDP during 2017-19. Arresting this trend is crucial to avoid adverse effects on long-term growth and welfare.  
RBI Report On State Finances

WATCH | Maharashtra FM Jayant Patil on the state’s finances

This is the first part in a series on the challenges faced by states in dealing with a steep slowdown in the Indian economy.

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