State finances to get messy on staggering populist policies - Emkay Global
This story was originally published at 18:03 IST on 29 October 2024
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NEW DELHI – Finances of state governments are set to get "messy" in the current financial year ending March due to election-related spending on freebies and extremely optimistic revenue projections, according to economists from Emkay Global Finance Services.
"This year, while they (states) are budgeting a 3.0% fiscal deficit from 2.8% (in 2023-24)... As of now, the evolving profile of states has not been too disturbing except in recent weeks or so," Madhavi Arora, Emkay Global's chief economist, said on Tuesday.
"But the kind of revenue forecast they have built up in their fiscal profiles for this particular year has made us believe that we are in for very messy state finances going ahead," Arora said, noting that the fiscal deficit of states, on the whole, may exceed budget estimates by 10-20 basis points.
According to Harshal Patel of Emkay Global, states' revenues will likely undershoot budget estimates "massively" thanks to populist schemes announced in the run-up to assembly elections. With little room for revenue expenditure to be cut, capital expenditure may again be sacrificed at a time when it is already lagging.
Informist had reported on Sept. 19 that the Centre had disbursed around INR 300 bln, or 20% of the allocation, to states so far in FY25 as part of the Scheme for Special Assistance to States for Capital Expenditure in the form of 50-year interest-free loans. Meanwhile, the Centre's overall capital expenditure in Apr-Aug was down 19% on year at INR 3.01 trillion, just 27% of the full-year target of INR 11.11 trillion.
Patel pointed out the huge overestimation in states' budgets for FY25 using the grants-in-aid from the Centre, which they see rising 41% from FY24 even though it had fallen by 24% last year. "There is no way this item will grow by such a high amount," Patel said.
On the expenditure front, Patel said the "breadth of populist spending has been quite staggering" in recent times and has happened across states and party lines.
The last one year has seen several states go to polls: Mizoram, Chhattisgarh, Madhya Pradesh, Rajasthan, and Telangana in November 2023; Arunachal Pradesh, Sikkim, Andhra Pradesh, Odisha, Jammu and Kashmir, and Haryana so far in 2024, with Jharkhand and Maharashtra set to vote next month. According to Emkay Global, the FY25 budget estimates for states' subsidies have shot up 26% to INR 3.7 trillion on the back of the "freebie wave".
"... as more and more states come up for elections, it will be very difficult for them to resist this populist tug. Bihar goes to polls next year, for example. You have had Odisha, Jharkhand, and Chhattisgarh all announcing financial assistance schemes for women in the last year or so. So it will be very difficult for Bihar to not follow suit. So this is now a medium-term concern and it's become a race to the bottom where each state will have to follow suit to keep up and they can't not succumb to the pressure," Patel said.
The Maharashtra government's own version of the financial assistance scheme to women, which has proven politically successful in several states, will set back the state around INR 460 billion. Patel pointed out that this was more than the states' entire allocation for agriculture.
"We reckon states will have to look for innovative avenues to mobilise their revenues better to improve their income profile so that they can spend without straining their balance sheet. The slippage in deficit will also lead to states borrowing heavily in H2FY25 (specifically Jan-Mar), especially for those states which are already facing fiscal pressure due to populist spending and revenue growth slowdown," Arora said. End
Reported by Siddharth Upasani
Edited by Saji George Titus
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