The Economic Survey’s latest volume had predicted that farm loan waivers by state governments could impart a short-term deflationary shock to the economy as the largesse would be funded by pruning spending and raising taxes, but it seems states started squeezing capex from the first quarter of the current financial year. The combined capital outlay of 12 states — with revenue receipts close to 60 per cent of all 29 states — contracted 19.3 per cent in Q1FY18 compared with a strong 51.9 per cent growth in the year-ago quarter, Icra said in a report.
The decline in states’ capex could not have come at a worse time for the economy, given its greater reliance on government spending as other growth engines are faltering.
Thanks to the early presentation of the Union Budget this year, the Centre’s capex grew 39 per cent in Q1FY18 compared with a decline of 16 per cent in the year-ago quarter; its revenue spending grew 25.9 per cent in Q1 this year against 24 per cent expansion in the same quarter of last year. With shortfalls likely under some revenue heads, the Centre would find it hard to keep the Q1 spending momentum throughout the year, which makes it incumbent on states to accelerate their spending.
According to Icra, the reduction in capital outlay by the 12 states is despite a healthy 16.5 per cent expansion of their own tax revenue (OTR) and an estimated 18.3 per cent rise in central tax devolution to them. Pertinently, Q1 is the quarter immediately before the roll-out of the goods and services tax, and which saw de-stocking by businesses (with a positive impact on trade and therefore state VAT receipts). Chances are that GST implementation would sustain the revenue buoyancy.
Of course, the capital outlay contraction by the dozen states reviewed by the rating agency is partly on account of the delayed budget presentation by Uttar Pradesh and Punjab, which went to polls in February; excluding these two states, the capex of the remaining 10 states rose by a modest 6.2 per cent in Q1FY18, sharply lower than 45.9 per cent in Q1FY17.
As far as the 12 states’ revenue expenditure is concerned, growth eased to 10.3 per cent in Q1FY18 against 15.9 per cent in Q1FY17. These states, therefore, produced a combined revenue and fiscal surpluses in the first quarter of this financial year. The budgeted capex figures of the Centre and states are comparable: The Centre spent Rs 68,328 crore in April-June this year while the 12 states reviewed by Icra — with roughly 60 per cent representation — spent Rs 38,500 crore. FE