The Indian Express | 2 months ago | 30-03-2023 | 01:45 pm
In the weeks following the Union budget, several state governments have presented their budgets for the upcoming financial year. These budgets detail the fiscal stance of states at a time when growth momentum is heavily dependent on the public sector driving economic activity.The trends highlighted here are based on 10 large states that have so far presented their budgets. As these include both high-income states such as Gujarat, Haryana and Telangana as well as low-income states such as Bihar, Uttar Pradesh and Madhya Pradesh, it does provide an idea of the fiscal stance at the state level during both the financial year that is just drawing to a close as well as the coming one. Five broad trends emerge.First, after a year of robust growth in revenues, states have pegged their revenue receipts to grow at a slower pace in the coming financial year, in line with expectations of slowing economic momentum. While there is marked variation across states, these 10 states, on aggregate, expect their revenue growth to slow down from roughly 19 per cent in 2022-23 to around 13 per cent in 2023-24 — the latter is in line with the Centre’s own revenue projections for the year.Second, the disaggregated data, however, raise some scepticism over these revenue projections. Some states have pegged their own tax and non-tax revenues to grow at a much faster pace in the coming financial year, in fact, outpacing the nominal GDP growth assumed in the Union budget by a considerable margin. These include states across the spectrum — from Bihar to Telangana and Uttar Pradesh. This is optimistic, to say the least.Considering expectations of the economic momentum slowing down sharply in the coming financial year — while the RBI has projected the economy to grow at 6.4 per cent in 2023-24, down from 7 per cent in 2022-23, other analysts are more pessimistic — the assumptions underpinning these budget revenues numbers appear to be ambitious. In the past, too, there has been considerable variation between state budgets expectations and actuality. Any shortfall in collections will imply a scaling back of states’ spending plans. And, as much of revenue expenditure is sticky in nature, the axe is more likely to fall on state capital expenditure.Third, in line with the slowdown in revenue growth, states have also pegged their spending to grow at a much slower pace in the coming financial year. Spending by states, which is pegged to have grown by just above 20 per cent in 2022-23, is expected to slow down to around 10 per cent in 2023-24, marginally lower than the growth in nominal GDP assumed in the Union budget.Aggregating the state-wise data from PRS shows that these states expect to spend roughly 1 per cent of their GSDP on transport. Total spending on health, nutrition, social and family welfare has been pegged at around 2.5 per cent of GSDP, while that on education is expected to be marginally higher. Some states have also continued to prioritise debt management, and have stepped up repayment of debt in both the ongoing and the coming year. On the other hand, spending by states on committed expenditures — salaries, pension and interest payments — has been pegged to grow at roughly the same pace as this year.Fourth, even as most of these states expect their revenue deficits to fall in the coming year, the budget documents do not signal significant fiscal consolidation. This implies that a greater portion of state borrowings will be used to finance capital expenditure. Further, most states who have provided their medium-term fiscal roadmaps do not also expect a sizeable reduction in their debt to GSDP ratios in the coming years.Fifth, even as overall spending by states is expected to slow down, capital expenditure by states is still projected to grow at around twice the pace of revenue expenditure in the coming year, in line with the expenditure priorities of the central government. This holds true for most of the high and low-income states. Capital expenditure of these states is pegged at above 3 per cent of GSDP. But, while the higher budgetary allocation for capex is a good sign, there are reasons for caution.This year there has been much concern over the slow pace of capital spending by states so far. However, the budget documents indicate that even now most states expect to either meet their capex targets or fall only marginally short of them. But, as per ICRA’s estimates, states have spent just around half of what has been budgeted for in the first 10 months of the year (April-January). This implies that states are unlikely to achieve their capex targets for the year.While spending patterns may be affected by uncertainty over their revenues, that capital spending by states is likely to remain well short of targets raises troubling questions over their capacity to spend. Moreover, an inability to meet this year’s targets will also raise questions over whether the ambitious targets for next year can be met or not.As states account for a sizeable share of public sector investments in the economy, slower growth in state capex implies that the overall public sector impulse to investment activity in the economy both this year and the next will perhaps be weaker than what was hoped for. This also raises questions on the extent to which a growth strategy that relies heavily on public sector investments to drive economic momentum in the country can be depended upon.ishan.bakshi@expressindia.com
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