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Capex crawls: Despite lower tax revenue, states give timely leg-up to public spend

Date: 12-09-2020
Subject: Capex crawls: Despite lower tax revenue, states give timely leg-up to public spend
Despite tax revenue falling by a fifth, 10 states reviewed by FE reported 7% expenditure growth in Apri-July.

Amid acute budget constraints, state governments have not only borrowed heavily during the lockdown period and but also used the proceeds expeditiously to step up budgetary spending to the extent possible. However, the question is how long would they tread the path; they may have already started reining in spending, given that the pandemic is burning a big hole in revenues.

Despite liberal transfers by the Centre from the divisible tax pool, tax revenues of states declined more than fifth year-on-year during April-July, but their expenditures seem to have grown faster than the year-ago period.

A review of the budgets of ten states by FE showed their combined expenditure in April-July grew 7% on year, compared with a rise of just 3% a year ago. These states’ tax revenue slipped 21% on year during the first four months of the current fiscal.

The Centre’s net tax revenue fell a steep 40% in April-July, but it kept the pace of budgetary expenditure at 11%, only marginally lower than 13.2% budgeted for FY21. However, it indeed applied the brakes on spending after meeting the eventuality of the immediate crisis precipitated by the pandemic – Budgetary expenditure grew just 6% on year in July compared with 46% in June.

Of course, the sinking economy requires far higher levels of public expenditure of both capex and non-capex varieties.

Among them, the ten states – Madhya Pradesh, Andhra Pradesh, Karnataka, Odisha, Telangana, Kerala, Chattisgarh, Haryana, Jharkhand and Himachal Pradesh – reported a combined capital expenditure of Rs 36,987 crore in April-July of FY21, which was 19% lower than in the year-ago period. In contrast, the Centre’s capex grew 4% in the first four months of FY21 even though it was much lower than the required rate of 22% to achieve its capex target for this fiscal.

Borrowings by these ten states rose a whopping 80% to Rs 1.11 lakh crore in April-July of this fiscal compared with 11% decline a year ago.

“Given that the borrowing limit set by the GoI acts as a soft constraint to the size of the state governments’ fiscal deficits, capital spending may have to be curtailed in aggregate by the states in FY2021 by Rs 1.0-3.4 trillion,” Icra wrote recently. This is after taking into account the anticipated shortfalls in GST compensation and central tax devolution, despite the two options for additional borrowings put forth by the central government for bridging the states’ GST revenue shortfall.

For perspective, states’ combined capital expenditure was pegged to increase 29% year-on-year to `5.81 lakh crore in FY20. The actual spending is believed to have been significatly lower. Among them, half a dozen states whose budgets were reviewed by FE (Karnataka, Andhra Pradesh, Kerala, Odisha, Chhattisgarh and Tripura), reported an aggregate 7.6% decline in capex in FY20, compared with a 10.2% growth in FY19. For a larger set of 14 states, capital expenditure had seen flat growth in the first eleven months of last fiscal (April-February), against a solid 20% growth in the year ago period.

Reduction of capex by states would be a drag on the gross domestic product, which various analysts have predicted to contract by roughly 10-15% in FY21. Public capex has been the pillar of economic activities in the past few years in the absence of strong private support. In recent years, public capex has been roughly in the 5:5.5:3.5 ratio among the CPSEs, states (budget) and the Centre (budget).

What is more worrisome for the states is that the Centre, which has been liberal by maintaining tax devolution at nearly the FY21 budgeted pace, has started adjusting the extra transfers and this may accentuate in the fourth quarter of FY21.

According to Icra, the shareable tax pool may turn out to be Rs 13.4 lakh crore in FY21, 30% lower than the budgeted amount of Rs 19.1 lakh crore. The agency has projected the central tax devolution to the state governments at about Rs 5 lakh crore (after adjusting for Centre’s extra transfers of Rs 48,400 crore in FY20) in FY21, a substantial `2.8 lakh crore lower than the Rs 7.8 lakh crore budgeted.

Former chief statistician Pronab Sen has estimated the shortfall in overall tax revenues for the states to be around Rs 4.5 lakh crore in FY21.

As per state budgets, their combined fiscal deficit stood at 2.4% of GSDP in FY19, the target (BE) for FY20 was 2.6%, but the deficit must have been significantly higher. FY21 will likely see a record spike in the fiscal deficits of both the Centre and states.

Icra prognosticates a combined fiscal deficit of a minimum of 4.25% of the GSDP and maximum up to 5.52% of GSDP for states in the current fiscal year, based on an analysis of the two options for state government borrowing in FY21 put forth recently by the Centre (inclusive of reforms based relaxations and those related to compensation for shortfall in protected GST revenues).


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