Big fiscal shift: Centre turns prudent while states slip into deep mess

Even though Centre’s fiscal deficit has come down to 3.5 per cent (projected to go down to 3.2 per cent this fiscal), the combined fiscal deficit could continue to edge towards 7 per cent or even higher due to bloating state deficits.

Written by Anil Sasi | New Delhi | Updated: July 19, 2017 5:56 am
 fiscal deficit, india fiscal deficit increasing, state fiscal deficit, indian economy, GDP, farm loan waiver, interest liabilities, excise revenues, india news, indian express What makes it worse for states is that some of them, Uttar Pradesh, Tamil Nadu, Rajasthan, Punjab, Haryana and Andhra Pradesh, are not eligible for additional market borrowing as they are not compliant with fiscal prudence norms prescribed by the fourteenth finance commission.

There has been a stark reversal in the country’s fiscal deficit trends with the situation likely to get worse from here on. States, which cumulatively were more fiscally prudent than the Centre until about three years ago, are now running bigger deficits and face the biggest fiscal hump this financial year — two years after having breached the gross fiscal deficit: GDP threshold of 3 per cent for the first time since FY’05.

This fiscal could be worse due to three key pressure points.

One, the spate of farm loan waivers across states, which had an impact of Rs 70,000 crore across just two states — Uttar Pradesh and Maharashtra. Second, the interest liabilities of states that have participated in financial restructuring of electricity distribution utilities (through the UDAY scheme) would increase going forward, given that states are slated to take over future losses of these utilities as per a graded trajectory that goes up from 5 per cent of losses in FY’17 to 10 per cent of FY’18. Third, at least about a dozen states are expected to see a substantial dip in state excise revenues from alcohol, traditionally the biggest revenue head after state VAT (value added tax), due to the closure of bars along highways and rising prohibition efforts across some states.

As a result, even though Centre’s fiscal deficit has come down to 3.5 per cent (projected to go down to 3.2 per cent this fiscal), the combined fiscal deficit could continue to edge towards 7 per cent or even higher due to bloating state deficits.

Apart from these three immediate pressure points, there are two additional fiscal stresses looming large for states: the guarantee commitments of state governments in respect of State Public Sector Enterprises that have emerged as a major source of potential risk to debt sustainability and the potential increase in committed liabilities of states in case they decide to implement the recommendations of their own Pay Commissions in 2017-18.

What makes it worse for states is that some of them, Uttar Pradesh, Tamil Nadu, Rajasthan, Punjab, Haryana and Andhra Pradesh, are not eligible for additional market borrowing as they are not compliant with fiscal prudence norms prescribed by the fourteenth finance commission.

Last week, Uttar Pradesh introduced a Rs 36,000-crore farm loan waiver scheme as part of its budget for this fiscal while Maharashtra, on June 24, announced Rs 34,000-crore crop loan waiver for farmers in the state.

The announcement came despite indications of worsening state finances, with Maharashtra’s public debt set to top the Rs 4 lakh-crore mark by March 2018 and the government facing the prospect of shelling Rs 31,027 crore from its plan spend for 2017-18 to service the debt while Uttar Pradesh, which had a fiscal deficit of Rs 3,070 crore in FY’91, has seen the deficit zoom to Rs 64,320 crore in FY’16

After Maharashtra and Uttar Pradesh, similar demands are being made by farmers across states such as Punjab, Haryana, Gujarat, Madhya Pradesh and Karnataka.

On the risks, Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India told The Indian Express: “There will be pressure on states to achieve their budgetary target in FY’18…we do expect that states have to either mobilise their additional resources internally or reduce part of their expenditure to be in line with the fiscal target of 3 per cent”.

That states have let their deficits bloat at a time when the Centre has turned serious about bringing down its deficit is evident from the numbers. States’ combined fiscal deficit, which had more than halved from 4.3 per cent of GDP in FY’04 to 2 per cent in FY’13, showed a sharp rebound to 2.5 per cent to touch 3.6 per cent of GDP in FY’16 — a thirteen-year high.

The RBI’s latest report on state budgets has highlighted the risks. “The recent initiative by several state governments of assuming additional debt liabilities as part of financial and operational restructuring of state power distribution companies (through issuance of UDAY bonds) has led to deterioration in fiscal health of states. This has been reflected in the worsening of key fiscal indicators. It is expected that states will take necessary steps to renew their efforts towards fiscal consolidation and reduce their liabilities,” the central bank noted.

Meanwhile, the Centre, during the current fiscal, plans to lower its fiscal deficit to 3.2 per cent and the revenue deficit to 1.9 per cent. An expert committee headed by former Revenue Secretary NK Singh, in a report made public in April, had called for a gradual reduction of the Centre’s fiscal deficit to 2.5 per cent of the GDP and revenue deficit to 0.8 per cent by 2022-23.

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