Hit by subdued tax revenue — growth in April-December 2019 was a flattish 1% — state governments have applied the brakes on capital expenditure (capex). An analysis by FE of the finances of 20 state governments — all big states except Bihar and Assam — showed that while the first nine months of last fiscal saw a year-on-year growth of 18% in their combined budgetary capex to Rs 2.2 lakh crore, there was an over 1% annual decline in such expenditure in the corresponding period of the current financial year. (see chart).
Since the revenue slippages from the targets set for FY20 have been huge, even a stepping up of market borrowings (read higher-than-budgeted deficits) hasn’t sufficed to salvage the capex budgets. While this would be a drag on the country’s GDP growth in the second half of FY20 (the spending curbs are likely to be more stringent in Q4), the overall government spending may still get solid support from the Centre’s Budget capex and, more substantially, from augmented capex by central public sector enterprises and other government undertakings like NHAI and the railways.
What is more worrisome for the states is the likely decline in the Centre’s tax transfers in the final months of the current fiscal; even in FY21, they may end up receiving lesser amounts as tax share from the Centre than what the 15th Finance Commission conceived based on seemingly optimistic projections of the Centre’s gross tax receipts.
Despite its revenue constraints attributable to a sputtering economy, the Centre’s budgetary capex for FY20, as per the latest budget, is slated to be Rs 3.49 lakh crore, up 3% from the budget estimate made in July last year. CPSEs among themselves will likely expend Rs 5.1 lakh crore as capex in the year, up 14% from the initial estimate, going by their April-December capital spending and the custom of aggressive spending in Q4.
In recent years, the ratio of public capex has been roughly in the 5:5.5:3.5 ratio among the CPSEs, states (budget) and the Centre (budget). Of course, the Centre also undertakes substantial off-budget financing of asset-creating projects – it has increasingly done this in recent years; even some states resort to off-budget means to finance capex, although on a limited scale.
Combined tax revenues of the 20 states reviewed were Rs 11.93 lakh crore in April-December in the current fiscal, against Rs 11.82 lakh crore in the same period last fiscal. Their GST receipts (S-GST plus compensation) werejust Rs 368,950 crore in April-Dec FY20, even lower than Rs 384,142 crore in the year-ago period, clearly reflecting the inadequacy of the GST compensation fund to meet the revenue shortfall. These states’ combined budgeted tax revenue target for the current fiscal is Rs 19.69 lakh crore (which means only 61% of the annual target was achieved in April-December). Though the tax receipts conventionally get a push in Q4, the gap is too big to bridge.
These states’ capex target for FY20 is Rs 5 lakh crore, against Rs 4.73 lakh crore achieved last year. Given that only 43% of the annual capex target for FY20 was achieved in the first nine months, there will clearly be considerable slippage. The 20 states have borrowed Rs 3,13,036 crore in April-December this fiscal, considerably higher than the year-ago period (Rs 2,52,183 crore).
The 15th Finance Commission (FC) has assumed a growth rate of 8.4% for the Centre’s gross tax revenues for FY20 compared with the growth of 4% assumed (RE) in the Union Budget. Even for FY21, the commission has assumed a tax revenue growth of 12.5% against a budgeted growth rate of 12%.
EY India chief policy adviser DK Srivastavaat wrote: “…the magnitude of union tax revenues in FY20 may fall well short of not only the FC estimates for FY20 but also the RE given in the Budget. This may also reflect in the magnitude for FY21, since FY20 revenues serve as the base year figures.
Accordingly, states’ revenue receipts are also expected to face significant revenue uncertainty both because of lower transfers from the Centre and subdued own tax revenues due to the economic slowdown. This may hamper their capacity to complement the Centre’s efforts to bring about fiscal stimulus in the economy”.