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MOSL: ECOSCOPE-States’ spending increases in 2QFY20, leading to wider deficit

ECOSCOPE: States’ spending increases in 2QFY20

** Based on the monthly finances data available for 18 major states (accounting for ~90% of all states’ spending), we note that their fiscal deficit was at 37.6% of budget estimates (BEs) in 1HFY20, much higher than 31.8% in the corresponding period last year. Tax receipts grew at a decadal low of only 2.4% YoY in 1HFY20, while total spending increased at 8.7%. Within total spending, revenue spending was up by 9.3% and capital spending by 4.5% YoY during the same period.

** After growing at a muted 1.4% YoY in 1QFY20, states' aggregate tax receipts increased 3.4% YoY in 2QFY20. Non-tax receipts - especially grants-in-aid from the central government - were up sharply, due to which total receipts of the 18 states increased at a four-quarter highest pace of 12.5% YoY in 2QFY20, as against a decline of 2% in the prior quarter. Consequently, total receipts increased 5.5% YoY in 1HFY20 and accounted for only 38.8% of BEs - the lowest in five years.

** In contrast to the marginal decline in 1QFY20, states' spending increased at a strong 16.6% YoY in 2QFY20. Both revenue and capital spending grew reasonably in 2QFY20. Total spending was 38.6% of BEs in 1HFY20, with capital spending at 30.7% and revenue spending at ~40% of BEs in 1HFY20.

** Since the center has guaranteed ~14% growth in tax collection for states by 2021-22, it might very likely have to offset lower growth in tax receipts of states in FY20 and thus face additional burden on finances. Therefore, while the shortfall in states' receipts would be lower than otherwise, tax collection of the general government could be lower by as much as INR3.7t (or 1.7% of GDP). If so, the unchanged deficit target implies that fiscal spending growth could be only ~13% in 2HFY20 versus the target of ~28%.