States' fiscal deficits touch 12-year high of 3.6% due to higher capex: India Ratings

16 May 2017 Evaluate

India Ratings and Research in its latest report has said that states' fiscal deficits rose to the highest since FY04 at 3.6 percent in FY16, but the expansion of state budgets have been mainly due to higher capital expenditure, which is a long-term credit positive for the states. It also said that in fact, the combined fiscal deficit of the states have been showing rising trend since FY12 when it stood at 1.2 percent of GSFD. However, according to the RBI’s State Finances Report 2016, the combined fiscal deficits jumped to a 12- year high of 3.6 per cent, which is the highest since FY04 when it had stood at 4.2 percent, due to Uday bonds that bailed out ailing electricity discoms.

The ratings agency noted that between FY12 and FY16, the combined fiscal deficit of the states surged by 1.7 percent of GDP. The report also pointed out that this was mainly because from a 30 bps revenue surplus in FY12, their finances saw a revenue deficit of 20 bps of GDP in FY16. It stated that this period also saw the states together adding 1 percent of GDP to the fiscal deficit by way of capex.

As per the report, during FY12-FY16, the average growth of states' aggregate capex was 23.7 percent. Between FY12 and FY16 close to 60 percent of total capex by the states was divided almost equally between transport (mostly roads and bridges), power and irrigation sectors. It also explained that while the Centre's capex remained under 2 percent of GDP since FY12, the combined capex-GDP ratio of the states has remained over 2 percent since then.

The report further said that there was deterioration in states fiscal deficit in 2016-17 to 3.4 percent, but the RBI termed overall fiscal position as sustainable in the long run, counting on the GST as a big positive for finances. Adding further, it said that despite the increase in the debt burden of the states in recent years, the overall fiscal position is found to be sustainable in the long run. However, it also warned that the increasing proclivity of the states to write off farm loans may scupper the positives.

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