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States may not be able to stick to the path of fiscal consolidation: Icra

Ishan Bakshi/New Delhi 12 Sep 18 | 05:32 AM

At the aggregate level, state governments have budgeted for a decline in their fiscal deficits in 2018-19. But according to an analysis by rating agency Icra, states may not be able to stick to the path of fiscal consolidation owing to factors such as farm loan waivers, election-related spending, and flood relief. 

Further, gross borrowings by state governments may well rise to Rs 5-5.3 trillion in 2018-19, up from Rs 4.2 trillion in 2018 notes ICRA in its latest assessment of state finances.

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In its report on state finances, the Reserve Bank of India (RBI) estimates that the aggregate fiscal deficit of all states would decline to 2.6 per cent of GDP in 2018-19, from 3.1 per cent earlier (FY2018 revised estimates). 

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But there are several reasons why this deficit target may not be met, says Icra. First, with elections in many states approaching, there is always the risk of fiscal profligacy. Past trends suggest that expenditure is often ramped up in the run up to elections as state governments have in the past announced new schemes or increased the allocation to existing welfare schemes.

“The risk of pre-election announcements from the state governments has added an element of uncertainty to their expenditure and borrowing requirements for FY2019," notes Icra.  Second, there could also be unforeseen expenditure on account of flood relief in states such as Kerala and Karnataka, which could exert pressure on state exchequers. 

Then, some states could see an increase in expenditure in the coming years on account of farm loan waivers and pay revisions. According to Icra, Karnataka, Maharashtra, Punjab and Rajasthan are yet to provide for Rs 607.6 billion for the farm loan waiver that has been announced by the respective state government. 

Then expenditure might rise on account of pay revisions, which in some cases may exceed budgeted levels. 

“Icra expects Punjab, Maharashtra and West Bengal to revise their pay and pension scales in the coming years, which would bloat their overall salary expenditure going forward," the Icra assessment said. 

The corresponding rise in revenue expenditure may lead some states to curtail their capital spending, worsening quality of expenditure.

“A rise in revenue expenditure beyond the budgeted levels, led by the funding of crop loan waivers, election-related spending and flood relief, may lead to fiscal slippage for some of the states, unless their capital spending is curtailed below, and/or their revenue receipts are enhanced above the level budgeted for FY2019," noted Jayanta Roy, Group Head - Corporate Sector Rating, ICRA.

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