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MOSL: ECOSCOPE-Lower receipts impact states’ growth in 1QFY20-Weak finances provide little room for fiscal stimulus

ECOSCOPE: Lower receipts impact states’ growth in 1QFY20; Weak finances provide little room for fiscal stimulus

 

• Last , India’s Finance Minister Ms Nirmala Sitharaman offered a quick shot in the arm for the economy by announcing several regulatory changes in line with the industry’s demand. The package, however, did not compromise on the fiscal prudence path the center is focused upon. In this note, we analyze 1QFY20 finances of 18 state governments and combine it with the center’s finances, which confirm that there is little room for the government to expand and stimulate the economy. In fact, the government may face challenges in spending as much as for FY20.
• Weak finances of the central government are well known; however, our analysis of 18 states (together account for ~91% of all states) reveals that there was no growth in their aggregate spending in 1QFY20, as against an average growth of 15% in the corresponding period in the last three years. Notwithstanding stagnant spending, aggregate fiscal deficit of states touched a 3-year high of 13.4% of budget estimates (BEs) in 1QFY20 as their receipts declined 1.8% YoY in 1QFY20.
• Within total spending, capital spending declined by a massive 18.5% YoY in 1QFY20 – the worst at least since FY12, as against an average growth of 14.3% during the corresponding period in the last three years. Revenue spending, on the other hand, grew only 4% YoY in 1QFY20.
• Since the center has guaranteed ~14% growth in tax collection for states by 2021-22, there is a high likelihood that the center will have to offset lower growth in tax receipts of states in FY20, which will put further burden on the former’s finances. Thus, it would be a pleasant surprise if the government spends as much as they have budgeted for FY20. These facts make us believe that there is no space for any fiscal stimulus.