States likely to fall short of spending targets, posing growth risk: Economists

Twelve states, which have released their local budgets over the past few weeks and forecast aggressive spending growth in 2023-24, are likely to fall short of their targets posing a risk to economic growth, experts said.

The states - including Maharashtra, home to the country's financial capital Mumbai, India's most populated state Uttar Pradesh and Prime Minister Modi's home state of Gujarat - are estimating expenditure to have risen 21.5 per cent in 2022-23, and plan to increase it further by 11 per cent in 2023-24.

However, actual spending data available for the April 2022-January 2023 period shows expenditure rose only 11 per cent compared to a year ago.

Economists say this trend was likely to be seen across all states.

States release their Budgets through the months of February and March, after the Union Budget is proposed.

"While the latest budgets are factoring in an aggressive spending growth in the coming year (2023-24), it must be borne in mind that states have generally failed to achieve their spending targets in recent years, I-SEC PD economists Tadit Kundi, A Prasanna and Abhishek Upadhyay wrote.

States collectively tend to spend more than the federal government and have an important bearing on growth and welfare.

"Expenditure (as a % of GDP) has fallen in FY23, despite buoyant revenues," wrote Pranjul Bhandari, said India chief economist at HSBC Securities and Capital Markets.

Bhandari attributes slower state spending to an end of a compensation cess, volatility in oil prices and an increase in commitments linked to social schemes sponsored by the Centre.

"In addition, steps have been taken to dis-incentivize off-budget borrowings by the states," Bhandari said.

"We believe each of these drivers of lower state spend are likely to spill over into FY24."

A lower rate of state borrowings, however, could provide some breathing space for the bond market, making for a silver lining, experts said.

Economists at HSBC expect state fiscal deficit to be 2.3 per cent of the country's gross domestic product (GDP) in FY23 and 2.5 per cent of GDP in FY24, both lower than the normal permissible limit of 3 per cent of GDP.

I-SEC PD expects states to borrow a gross amount of around Rs 8.1 lakh crore and a net amount of Rs 5.3 lakh crore in the coming year.

In FY23, states borrowed Rs 7.6 lakh crore, below the budgeted Rs 9.1 lakh crore.