HEADLINES:
December 14 2018
‘States may miss FY19 fiscal targets’
17 September 2018

Spending on elections among populist measures to blame, says ICRA

Funding of farm loan waivers, poll-related spending and other populist measures are likely to ensure that States are set to miss their fiscal consolidation targets budgeted at the beginning of the year, says a report.

“Given the factors such as funding of crop loan waivers, election-related spending and the flood relief will see the States miss their fiscal consolidation targets,” ICRA wrote in a note.

The States’ fiscal deficit is primarily financed by issuing State development loans (SDLs). In April-August of FY19, gross issuance of SDL contracted by 3.4% to ₹1.32 trillion, primarily led by a sharp decline in issuance by Uttar Pradesh, Maharashtra and Gujarat.

However, excluding these three States, total SDL issuance by the remaining States has grown 14.7% in the first five months of FY19.

Redemption of SDLs

The agency also estimates that ₹1.3 trillion of SDLs are scheduled to be redeemed in FY19, much higher than ₹0.8 trillion redeemed in FY18.

“Given the sharp rise in the redemption amount, and assuming an annual growth of 10-20% over the net SDL issuance of ₹3.4 trillion in FY18, gross SDL issuance may rise to ₹5-5.3 trillion in FY19 from ₹4.2 trillion in FY18,” says the report.

Recently, the Reserve Bank of India had estimated that fiscal deficits of all the 29 States might decline to 2.6% of their gross State domestic product (GSDP) citing their FY19 Budget estimates, from 3.1% in FY18.

But an analysis of the FY19 Budgets of nine States, accounting for about 62% of the combined GSDP of all 29 States in FY17, shows that their fiscal deficits are budgeted to slip to 2.5% of GSDP in FY19 from 2.6% in FY18.

As 12 of the 29 States, three of which were part of the nine included in the analysis, are also poll-bound, apart from the general elections before May 2019, there is a risk of new schemes being announced or a higher allocation for welfare schemes, the note said.

The unforeseen expenditure on flood relief in states like Kerala and Karnataka, which may not be fully offset by higher grants or other revenue mobilisation measures, can exert pressure on their fiscal balances, he said.

 

 

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