By Raunak Bhiwal
The central government has found it hard to meet its target of 3.2% deficit for the Union budget. The target saw an upward revision to 3.5% for 2017-18. Recent news of deteriorating state government finances just adds to the financial woes of the country. India already boasts of the second-largest budget deficit among the major economies, just behind Brazil. The combined deficit of the country has crossed 6% to the GDP.
How does the story look like?
A lot of focus has been on the central government, but if we move a bit towards the states, it seems like they are borrowing as if there is no tomorrow. The deficit of the states has been ballooning with no respite in sight. In 2016-17 the estimated state budget deficit stood at 3%. Though the final figures are not out yet, given the central governments failure to attain its target the estimate of 3% may be breached. In 2015-16, the state fiscal deficit touched 3.6% crossing 3% for the first time in over a decade. This is despite the increased revenue from petroleum, service tax rates, and savings from petroleum subsidies over 2013-18. The fiscal-deficit is largely where it was at its best. There is a near certainty it will go south in 2018-19.
UPs CM Yogi Adityanath had a hard task of managing a fiscal deficit of 5.6% in 2015-16 (up from 3.1% in 2014-15), which is back to 3.9% for 2016-17 (estimated). The situation has improved for Rajasthan also where the number stood at 10% in 2015-16. Nevertheless, the financial woes still exist, with the 2016-17 number standing at 5.8%.
Goas deficit is as bad as it was in 2015-16. Manohar Parrikars government has not been able to bring about any improvement on the financial front for its state. For Goa, the deficit is at 6.8% both for 2015-16 and 2016-17.
Why does it matter to anyone?
If I spend more than I earn, I have to borrow money. The more I borrow money, the higher will be my interest portion in the next year. The more of my income is allocated to the interest, the lesser will be the funds available for development. In 2016, UP, West Bengal, Punjab, and Goa had outstanding liabilities exceeding 32% of their GDP. As a result, none of the states could significantly ramp up their development expenditure in the preceding three years. The states are becoming more dependent on the market forces for loans. RBI pointed out that 69.7% of the borrowing was from the market in 2014-2015, as per RBI records the gross market borrowings stood at 85% in 2016-17. “This could eventually raise concerns about debt sustainability, leading investors to demand even more premium over central government securities to subscribe to state development bonds,” said Priyanka Kishore, lead Asia economist at Oxford Economics, Singapore.
In the recent time, the spread between the ten-year benchmark bond and the average cut-off on the state government bonds has widened to more than 60 bps from 55 bps in mid-Feb. Such high rates would put pressure on future borrowings, further hampering the development. For the year 2017-18, the income tax increased by 0.43% of GDP, IDT revenues declined by 0.06% of GDP. It is necessary to note that the numbers for 2017-18 are just estimates and the growth in Income tax is assumed to be at 18.6% whereas the actual growth was of 17.1% for the period April-December,2017. If in the last quarter the growth rate sticks to 17.1% there would be an additional shortfall of INR 13,200 crores.
India recently went through PNBs fiasco, GST collections have not met the expectations, and the growth rate has slowed down. India needs to bring about structural reforms in the market, also need to invest heavily in the social sector. Education, healthcare and transportation impact us directly, and these are under state governments control. Given the finances and the looming elections, it seems hard to see governments making meaningful expenditures unless their finances are in orders. Devendra Fadnavis Maharashtra government announced farm-loan waiver worth INR 13,500 crore. With state elections in line, such waivers will become a common sight.
What does the future hold?
The government has been resorting to unreliable sources of funding, disinvestment to be specific. Excluding disinvestment proceeds would add 0.4% of the GDP to the internationally accepted definition of the fiscal deficit. Such proceeds may dry up in adverse market conditions. IPOs of Hindustan Aeronautics and Bharat Dynamics are lined up and it is to be seen how they perform in the market.
The country is up for general elections in 2019, and there are some major state elections lined up. The central government would not want to leave anything to chance if the results of the rural areas in the recent Gujarat elections are something to go by. In 2018, there are a few state government elections lined up. The central budget did not have any of the expected big bang reforms, the rest of the year can be expected to be filled with sops. A country does not have infinite resources. If India does not see the growth it projects, the bulb of India shining may fuse.