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MOSL : ECOSCOPE: Combined fiscal deficit at just 15% of BEs in 1QFY23

ECOSCOPE: Combined fiscal deficit at just 15% of BEs in 1QFY23

• Based on provisional data of 21 states (together accounting for ~95% of all states), though total spending of all states grew ~15% YoY in FY22P, total receipts grew faster at 25% YoY. Consequently, the states’ aggregate fiscal deficit came lower at INR6.4t in FY22P (or 2.7% of GDP), than ~INR8t in FY21 (4% of GDP) and INR8.7t in FY22RE (3.8% of GDP).
• Odisha (OD) was the only state to report a fiscal surplus (3.6% of GDP) in FY22P, following a fiscal deficit (1.8% of GDP) in FY21. Gujarat (GJ), Jharkhand (JH), Chhattisgarh and Uttarakhand (UK) posted nominal fiscal deficit at 0.8%-1.5% of GDP last year, while Kerala (KL), Punjab (PB) and Assam (AS) recorded the highest fiscal deficit at 4.6-5.1% of GDP in FY22P. Maharashtra (MH), the largest Indian state, clocked a deficit of just 2% of GDP, while Uttar Pradesh (UP) registered a deficit of 1.7% of GDP.
• A combined analysis of the center and states suggests that while total spending grew 13% YoY in FY22P, total receipts spiked 33% YoY. Consequently, India’s combined fiscal deficit contracted to 9.4% of GDP in FY22P from 13.2% of GDP in FY21. Total receipts stood at a three-year high of 20.6% of GDP in FY22P, while total spending declined from its peak of 31.7% of GDP in FY21 to 30% of GDP in FY22P. Importantly, the fiscal capital expenditure (capex) increased sharply to a 14-year high of 4.5% of GDP in FY22P from 3.7% of GDP in the previous few years.
• For FY23E, the states have budgeted a growth of 17%/20% (v/s FY22P) in total receipts/spending, respectively, implying a fiscal deficit of 3.4% of GDP v/s 3.7% in FY22BE. Combining the center’s FY23BE, total fiscal receipts are budgeted to grow 8% this year, with 9.5% growth assumed in total spending. Although capex is budgeted to increase 26% to 5.2% of GDP in FY23BE, combined fiscal deficit is likely to widen to 9.8% of GDP.
• In 1QFY23, states’ total receipts (based on 18 states, accounting for ~87% of all state receipts) grew 35% YoY – marking a double-digit growth for the sixth consecutive quarter. While states’ own receipts (taxes and non-taxes) shot up 46% YoY in 1QFY23, following 88% YoY growth in 1QFY22, transfer from the center (devolution + grants) surged 20% YoY in the quarter. Conversely, total spending of all states is estimated to have increased 12% YoY in 1QFY23, marking a double-digit growth for the sixth consecutive quarter too. However, capex (excluding loans & advances) declined for the second consecutive quarter in 1QFY23.
• Because of higher growth in receipts than in spending, states’ fiscal deficit was just INR0.5t (or 0.7% of GDP) in 1QFY23 (assuming a 17.3% YoY growth in nominal GDP), marking the slowest deficit in seven years.
• A look at individual state data reveals that seven states – GJ, JH, KA, MH, OD, UP and UK – exhibited a fiscal surplus in 1QFY23. The remaining 11 states (for which we have 1QFY23 data) showed fiscal deficit in the range of 3-86% of their FY23BE. At the one extreme were Punjab (PB) and Tamil Nadu (TN) with fiscal deficit at only 3-6% of FY23BE and on the other extreme was Bihar (BH) with 1QFY23 fiscal deficit at 86% of FY23BE.
• The combined 1QFY23 financial accounts of the central government and all states suggest that while total receipts grew 22.6% YoY in 1QFY23 (v/s 13.3%/115.3% YoY in 4QFY22/1QFY22), total spending rose 13.2% YoY last quarter (v/s 7.7%/8.9% YoY in 4QFY22/1QFY22), respectively.
• Although states’ fiscal deficit was the lowest in seven years, fiscal deficit of the central government was high enough to take the combined fiscal deficit to INR4.0t or 6.6% of GDP in 1QFY23, v/s 15.1%/8.4% of GDP in 4QFY22/1QFY22. Notwithstanding higher Center’s deficit (v/s states), the combined deficit was just 15% of FY23BE, the lowest since FY12.
• Importantly, while states’ capex declined for the second consecutive quarter in 1QFY23, strong capex growth by the Center helped combined capex to surge 30% YoY in the quarter. Therefore, while states’ capex in 1QFY23 was less than 10% of FY23BEs, combined capex stood at 17.1% of BEs, among the highest in the past decade propelled by the Center.