Amid acute spending budget constraints, state governments have not only borrowed heavily post Covid but also employed the proceeds expeditiously to step up budgetary spending to the extent probable. However, they had to undertake sharper capital expenditure cuts in very first seven months of existing fiscal to sustain the momentum of welfare and routine spending.
According to a evaluation of budgetary spending by 12 states by FE, in April-October this year, their capex was down 23% on-year contemplating that the combined capex by all states was budgeted to raise by 30% on-year in FY21, the slippage in state capex from the spending budget target is confident to have been unprecedentedly steep.
Despite 1.2% raise in income expenditure to cater for crucial spending such as on welfare and relief measures, decrease capex pulled down these states’ total expenditure by 1.4% on-year in April-October this fiscal. For the Centre, the general spending budget spending in the very first seven months was flat on-year.
If public-sector fixed capital formation has held up in current years even amid a worrisome, prolonged decline in private investments, the contribution of state governments has been important state capex is also observed to have a larger development multiplier possible than Central Budget/CPSE capex.
While Centre’s Budget capex declined 2% on-year in April-October, a conscious work is becoming created by the government to assure that the CPSEs ramp up investments in this fiscal.
The curbing of capex by the states is mainly due to the acute income constraints they are facing. While the low income buoyancy was evident in the final year itself, the scenario has aggravated due to the pandemic. Even soon after liberal transfers by the Centre from the divisible tax pool in the initial months of this fiscal, tax revenues of the 12 states declined by 16% on-year in the course of April-October.
To be confident, quite a few states have in current months observed a rise in personal tax revenues (OTR) from the lows witnessed in the lockdown period. From the variety of 25-50% of standard in May, OTR of most states in October either surpassed or was at par with the exact same in the year ago month.
Information gathered by FE shows that Karnataka collected Rs 9,272 crore as OTR in October, up 14% on-year and Rajasthan garnered Rs 5,544 crore (up 25%). Kerala’s personal tax collection in October was about 90% of the mop-up in the year-ago month.
Among them, the twelve states — Tamil Nadu, Madhya Pradesh, Andhra Pradesh, Karnataka, Rajasthan, Odisha, Telangana, Kerala, Chhattisgarh, Haryana, Jharkhand and Uttarakhand — reported a combined capital expenditure of Rs 92,391 crore in April-October of FY21 compared with Rs 1,14,011 crore in the year ago period.
The combined capex by all states is projected to rise to Rs 6.46 lakh crore in FY21 more than FY20 actuals. The states had slashed their capex to Rs 4.97 lakh crore in FY20 from BE of Rs 6.22 lakh crore, as per the current RBI report on state finances. “Capital expenditure undertaken by states, which accounts for more than 60% of general government capital expenditure is generally treated as a residual and is prone to adjustment, conditional upon revenue generation. In 2017-18 and 2018-19 as well, capital spending was reduced from budgeted levels,” the RBI stated in the report.
Borrowings by the twelve states whose finances had been reviewed by FE rose 50% on-year to Rs 2.28 lakh crore in April-October of this fiscal compared with 2.6% raise in the year ago period.
What is additional worrisome for the states is that the Centre which transferred budgeted amounts to state governments as their tax share from divisible pool in April-May, but has considering the fact that discovered this practice unsustainable — October transfers had been a fifth much less than envisaged in spending budget, at Rs 37,233 crore. The customary pattern is the Centre tends to make adjustments on state tax transfers primarily based on actual receipts only in the course of February-March, the final two months of a economic year.
With tax devolution coming down drastically in the remaining months of this fiscal, the states are confident to additional accelerate borrowings to make up partly for income shortfalls.
According to Icra, the shareable tax pool may possibly turn out to be Rs 13.4 lakh crore in FY21, 30% decrease than the budgeted quantity of Rs 19.1 lakh crore. The agency has projected the central tax devolution to the state governments at about Rs 5 lakh crore (soon after adjusting for Centre’s added transfers of Rs 48,400 crore in FY20) in FY21, a substantial Rs 2.8 lakh crore decrease than the Rs 7.8 lakh crore budgeted.
As per state budgets, their combined fiscal deficit stood at 2.6% of GDP in FY20 and 2.4% in FY19. FY21 will, on the other hand, probably see a record spike in the fiscal deficits of each the Centre and states.