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MOSL: ECOSCOPE-States’ capex crashes in 1QFY18 but consumption spending grows decently

​ECOSCOPE: States’ capex crashes in 1QFY18 but consumption spending grows decently

We note that the central government spent profusely in 1QFY18 due to the advancement of the Union Budget by a month, achieving ~81% of the budgeted estimates (BE) for the fiscal deficit by June 2017. However, our analysis of 14 states (which have published fiscal data up to June 2017) paints a sharply contrasting picture, with the fiscal deficit at only 7.4% of BE.

Lower fiscal deficit of states has been a result of subdued growth in total spending (4.7% YoY) amid better growth in tax receipts (16.3% YoY). Within total spending, states’ core revenue spending (total revenue spending less interest payments) grew decently (+9% YoY) in comparison to a sharp decline (-24.8% YoY) in capital spending. On the other hand, it appears that states’ own taxes have lagged the receipts from central devolution.

As discussed earlier, government consumption is likely to be a key driver of real GDP growth in 1QFY18. However, with general government (center + 14 states) budgeting slowest spending growth in more than a decade, its contribution to GDP growth should come under stress this year. Thus, we continue expecting sub-7% real GDP growth in FY18.