States show fiscal prudence despite election temptation

New Delhi; The aggregate fiscal deficit of 26 states is estimated to come down to 3% of GDP in 2024-25 from 3.4% projected in the current financial year, a positive trend on fiscal prudence despite temptation of increased spending on social welfare schemes in an election year, an analysis of state budgets conducted by India Ratings and Research (Ind-Ra) showed.

The combined revenue deficit or the gap between revenue receipts and expenditure, is budgeted to come down to 0.2% in the financial year beginning April 2024 as compared to the projected 0.5% in the current fiscal. The budgeted revenue deficit for 2024-25 is the lowest since 2018-19.

As a result, the quality of the fiscal deficit, which is measured by the revenue deficit as a percentage of fiscal deficit, has improved. This also means borrowings are primarily used for capital expenditure.

Senior analyst at India Ratings and Research Paras Jasrai said, “Though the fiscal deficit is budgeted at 3% in FY25, it’s tilted more towards capex which is a positive development.”

The state governments’ focus on capital expenditure and fiscal prudence, despite the general election, is encouraging.  

“Yes, states tend to push spending on developmental services such as social and economic services during this time. But what is special this year is the trend of higher spending on capital outlay on social services such as medical and public health and education,” said Jasrai.

Another indicator which helps in gauging the quality of public expenditure is capital outlay as percentage of total expenditure (COTE). The COTE ratio of 26 states is budgeted at 15.9% in FY25, same as FY24 (revised estimate). However, it is higher than 13.7% recorded during FY18-FY20.

Out of 26 states, 19 have budgeted an increase in COTE in FY25 compared to the pre-pandemic average. However, the ratio is projected to decline in states such as Bihar, Haryana, Himachal Pradesh, Karnataka, Mizoram, Punjab and Telangana in FY25.

“Karnataka’s fiscal deficit has been budgeted higher in FY25 but the good thing has been that it is within the prudential norms,” said Jasrai.  

“Moreover, the higher spending has been on social services within revenue expenditure which is expected to provide succour to the lower income strata of the population and demand-enhancing for the state economy,” he added.

The aggregate revenue receipts of 26 states is budgeted to grow by 9.2% to Rs 44.2 lakh crore in FY25 over FY24 (RE). The FY25 budgeted growth in revenues would be the lowest since the pandemic started in FY21, Ind-Ra analysis showed.

The sluggish growth in revenue receipts is primarily due to a contraction in grants from the central government. The grants plus tax devolution from the union government to states are projected at 5.5% of GDP in FY25 (at a multi-year low).

The revenue expenditure is budgeted to increase to Rs 44.9 lakh crore in FY25, which is 7.2% higher when compared with the FY24 (RE). This would be 13.7% of GDP in FY25, still higher than the pre-pandemic average of 13.3% during FY18-FY20.

The states have budgeted gross and net market borrowings at a record high of Rs 10.2 lakh crore and Rs 7.2 lakh crore, respectively, in FY25. However, as a percentage of GDP, it is estimated to decline to 2.2% in FY25 from the projected 2.3% in FY24.