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MOSL: INDIAN ECONOMY – STATE BUDGETS (THEMATIC)-When will government accept fiscal policy limits?

INDIAN ECONOMY – STATE BUDGETs (THEMATIC): When will government accept fiscal policy limits? A denial is likely to weigh on private sector massively

 

Continuing our practice of the last two years, we analyze the 2019-20 budgets of 20 major states of the Indian economy, which together account for ~93% of national GDP and ~95% of total spending by all states. Although every minute detail of the Union Budget is deciphered by the markets, state budgets do not receive their due share of attention. At the beginning of 21st century, states' spending was similar to that of the central government. However, the size of states' spending has increased tremendously over the past few years, as they now receive a larger share of union taxes and are guaranteed by the center for any GST shortfall. Consequently, states' spending was ~135% of the Union Budget in FY19, and (net) market borrowings by states are budgeted to be higher than those of the center for the first time ever in FY20. A combined analysis of the states and the center, thus, is required to understand the fiscal policy of the economy. Our key findings are:

• Total fiscal spending in FY18 grew much slower than what was suggested by revised estimates (RE), and thus, real GDP growth for FY18 could be revised down by more than one percentage point (pp) to ~6%. With fiscal policy reaching limits, its support to economic activity will remain weak in FY20 too. We expect 6.8% growth this year.
• Fiscal deficit of the general government (center + states) fell sharply from 7% (incl. UDAY) of GDP in FY17 to a decade-low of 5.8% in FY18; however, the aggregate deficit of the public sector was at a six-year high of 8.4% of GDP due to record borrowings by central public sector enterprises (CPSEs). Aggregate deficit stayed high at 8.3% of GDP in FY19RE but is budgeted to fall to 7.7% in FY20 (again due to CPSEs).
• It is then not surprising that such massive borrowings by the public sector (or general government) would consume a larger share of financial savings in the economy, and thus, has the potential to tighten market liquidity and crowd out private borrowings. Will the RBI buy G-secs under open market operations (OMOs) in FY20 as well? Well, they may have to, in our view.