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28 March, 2017 13:33 IST
Higher capital expenditure drives rise in state fiscal deficits in FY17: ICRA
Source: IRIS | 17 Mar, 2017, 02.46PM
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Moderate growth in sales tax collections and substantial expansion in grants from the Centre have prevented a sharp cut-back in expenditure growth of the state governments after the note ban. Moreover, higher capital spending and extension of loans appears to be the chief driver of the sharp rise in states’ fiscal deficits as well as borrowings in FY2017, in ICRA's view.
 
Jayanta Roy, Group Head - Corporate Sector Rating, ICRA, said, ''The note ban has selectively affected some revenue streams of the state governments, such as stamps and registrations collections and land revenue. However, moderate growth in sales tax collections and substantial expansion in grants from the Centre have averted a sharp cut-back in expenditure growth of the state governments after the note ban, supporting the overall economic activity in the country.''

''Encouragingly, the 16% expansion in the states' capital spending outpaced the 12% rise in their revenue expenditure in 10M FY2017, and stood in sharp contrast to the 3% contraction in the Union Government's capital expenditure in the same months. Higher capital spending and extension of loans, which may be partly on account of the UDAY scheme, appear to be the chief drivers of the sharp rise in the states' fiscal deficits in April-January FY2017,'' Roy added.
 
The ICRA study is based on monthly unaudited fiscal data for April 2016-January 2017 published by the Comptroller and Auditor General for eight states, viz. Chhattisgarh, Gujarat, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab and Tamil Nadu, which together account for nearly 50% of India's GDP.

Unaudited data for the first 10 months of FY2017 indicates a 12% rise in the revenue receipts of the eight states, boosted by the 36% expansion in grants from the Centre and 16% growth in the states' own non-tax revenues, whereas tax revenues rose by 9%. Incremental receipts of grants from the Centre of Rs 236.58 billion, have nearly rivalled the rise in states' own tax revenues (SOTR), estimated by ICRA at around Rs 260 billion in 10M FY2017.

The major components of the SOTR have recorded disparate trends in 10M FY2017. On a positive note, growth of sales tax collections in 10M FY2017 was relatively healthy at 12%, shrugging off concerns regarding the temporary impact of the note ban on consumption. In ICRA's view, healthy consumption of fuels, on which several states impose high VAT rates, as well as a pick-up in non-cash transactions that would have improved compliance, is likely to have bolstered the growth of states’ sales tax collections in the recent months. Sales tax collections typically account for around three-fifth of the states’ SOTR.

In contrast, stamps and registration collections and land revenue of the states contracted by 4% and 15%, respectively, in 10M FY2017, which is likely to have been led by the slowdown in activity in the construction and real estate sectors after the note ban. ICRA expects the recovery in these sectors to be somewhat prolonged, drawing out the adverse impact on the associated revenue streams of the state governments.

On the expenditure side, the 16% expansion in states' capital spending outpaced the 12% rise in their revenue expenditure in 10M FY2017. Nevertheless, the quality of the states' expenditure remained subdued, with capital outlay accounting for a modest 11% of the total spending of the state governments in 10M FY2017. However, the growth in the states' capital spending is in sharp contrast to the 3% contraction in the Union Government's capital expenditure during April 2016-January 2017.

The combined revenue account balance of the eight state governments recorded an improvement in 10M FY2017 on the back of the healthy rise in grants from the Centre. However, their fiscal deficit rose sharply to Rs 922.70 billion in April-January FY2017 from Rs 666.90 billion in April-January FY2016, led by higher capital spending and extension of loans and advances, which may be partly on account of the UDAY scheme. The gross State Development Loans raised by these eight states in April-January FY2017 were also Rs 264.72 billion higher than the amount raised in April-January FY2016, similar to the rise in their combined fiscal deficits.

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