States’ spending increases in 2QFY20, leading to wider deficit
Spending growth in 2HFY20 could be less than half of the target
20 November 2019
The Economy Observer
Based on the monthly finances data available for 18 major states (accounting for ~90% of all states’ spending), we note
that their fiscal deficit was at 37.6% of budget estimates (BEs) in 1HFY20, much higher than 31.8% in the corresponding
period last year. Tax receipts grew at a decadal low of only 2.4% YoY in 1HFY20, while total spending increased at 8.7%.
Within total spending, revenue spending was up by 9.3% and capital spending by 4.5% YoY during the same period.
After growing at a muted 1.4% YoY in 1QFY20, states’ aggregate tax receipts increased 3.4% YoY in 2QFY20. Non-tax
receipts – especially grants-in-aid from the central government – were up sharply, due to which total receipts of the 18
states increased at a four-quarter highest pace of 12.5% YoY in 2QFY20, as against a decline of 2% in the prior quarter.
Consequently, total receipts increased 5.5% YoY in 1HFY20 and accounted for only 38.8% of BEs – the lowest in five years.
In contrast to the marginal decline in 1QFY20, states’ spending increased at a strong 16.6% YoY in 2QFY20. Both revenue
and capital spending grew reasonably in 2QFY20. Total spending was 38.6% of BEs in 1HFY20, with capital spending at
30.7% and revenue spending at ~40% of BEs in 1HFY20.
Since the center has guaranteed ~14% growth in tax collection for states by 2021-22, it might very likely have to offset
lower growth in tax receipts of states in FY20 and thus face additional burden on finances. Therefore, while the shortfall
in states’ receipts would be lower than otherwise, tax collection of the general government could be lower by as much as
INR3.7t (or 1.7% of GDP). If so, the unchanged deficit target implies that fiscal spending growth could be only ~13% in
the target of ~28%.
In this note, we assess the finances of 18 state governments – Andhra Pradesh (AP),
Chhattisgarh (CT), Gujarat (GJ), Haryana (HR), Himachal Pradesh (HP), Jharkhand
(JH), Karnataka (KA), Kerala (KL), Madhya Pradesh (MP), Maharashtra (MH), Odisha
(OD), Punjab (PB), Rajasthan (RJ), Telangana (TS), Tamil Nadu (TN), Uttar Pradesh
(UP), Uttarakhand (UK) and West Bengal (WB).
Aggregate fiscal deficit of
the general government
was 73.5% of BEs in 1HFY20
– the highest in three years
and the second highest in a
Fiscal deficit of states at 37.6% of BEs in 1HFY20…:
The fiscal deficit of the 18 states
stood at 37.6% of BEs in 1HFY20, much higher than 31.8% in 1HFY19 but slightly
lower than the average of 39% during the corresponding period in the last three
Combining the center’s finances with the 18 states, the aggregate
fiscal deficit of the general government (GG) stood at 72.8% of BEs in 1HFY20 – the
highest in three years and the second highest in a decade barring FY17 (Exhibit
Exhibit 2: …because of which the general government’s
fiscal deficit was 73.5% of BEs in 1HFY20
(% of BEs)
76.1 69.2 71.5 72.8
56.8 54.8 60.8
Fiscal defict of GG
Exhibit 1: States’ fiscal deficit increases in 1HFY20, along
with that of the center…
(% of BEs)
Data for 1H of respective years
Source: Comptroller and Auditor General (CAG), Controller General
of Accounts (CGA), Budget documents, CEIC, MOFSL
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
– Research Analyst
(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
Bloomberg, Thomson Reuters, Factset and S&P Capital.