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MOSL: INDIAN ECONOMY – STATE BUDGETS (THEMATIC)-Fiscal policy has reached limits-Combined analysis of center and states’ budgets suggests so

INDIAN ECONOMY – STATE BUDGETs (THEMATIC): Fiscal policy has reached limits; Combined analysis of center and states’ budgets suggests so

 

Following our practice adopted last year, we analyze the 2018-19 budgets of 20 major states of the Indian economy, which account for ~93% of national GDP and ~95% of total spending by all states. Though every minute detail of the Union Budget is deciphered by the markets, state budgets don't receive their due share of attention. Together, state budgets are more than 160% of the Union Budget and the market borrowings by states will be similar to those of the center in FY19 for the first time in the history of liberalized India. To understand fiscal policy of the economy, thus, a combined analysis of the states and the center is required. Our key findings are:

• Notwithstanding general elections in 2019, real spending of the general government (center + states) is budgeted to slow down to 6.6% YoY in FY19 versus an average growth of 9.1% in the previous three years. Historical analysis of the spending patterns during election years since late 1990s suggests their linkages with election results.
• GST implementation has brought immense optimism to the general government, which has budgeted record-high taxes of 18.7% of GDP for FY19, better than 17.6% in FY08. Spending, however, is budgeted to grow moderately, due to which the combined fiscal deficit is budgeted at 5.7% for FY19.
• After a decline in capital spending in FY18RE, fiscal capex is budgeted to grow 11.6% YoY in FY19, similar to 11.3% growth budgeted for core revenue spending. If so, the contribution of government spending (consumption + investment) to real GDP growth is set to fall further in FY19. Consequently, we peg our real GDP growth forecasts at 6.9% for FY19, better than 6.7% in FY18, but lower than the consensus of 7.3-7.4%.