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MOSL: ECOSCOPE-States’ finances remain constrained-Despite better Aug’19, progress in FY20 disappointing

ECOSCOPE: States’ finances remain constrained; Despite better Aug’19, progress in FY20 disappointing

 

• An analysis of the monthly finances of 17 state governments (fiscal numbers published up to Aug’19) reveals the continuation of a worrying trend. Total receipts of 17 states grew only 4.1% YoY in the first five months of FY20 (Apr-Aug’19) despite ~26% YoY growth registered in Aug’19. Total spending of 17 states also grew ~16% YoY in Aug’19; capital expenditure (excluding loans & advances), a component of total spending, posted its first growth (strong 24.4% YoY) in four months. For the first five months of FY20, while capital expenditure grew only 0.6% YoY, core revenue spending (excl. interest payments) grew 7.6% YoY. Thus, total spending of states grew at nine-year low of 5.8% in Apr-Aug’19.
• As a percentage of budget estimates (BEs), states’ total/tax receipts were at a decadal low of 31.5%/33.0% in Apr-Aug’19. Consequently, total spending of states was only 31% of BEs – the lowest in five years – with capital expenditure/core revenue spending at only 23.0%/33.6% of BEs. Combined fiscal deficit of states in the first five months, however, stood at 28.2% of BEs, higher than 26.6% in the corresponding period a year ago.
• The recent release of the (2019-20), confirms that states’ fiscal deficit in FY18 was 2.4% of GDP, lower than the revised estimate (RE) of 3.1%, which is in line with of states finances as well. Although the states’ targeted deficit was 2.9% in FY19, the actual, we believe, was lower at 2.5% of GDP, reflected in lower-than-budgeted borrowings. Overall, weak receipts have constrained states’ capacity to meet their spending targets with tight financial markets also restraining their ability to borrow excessively. We, therefore, expect FY20 to replicate FY18/ FY19.