States overall deficit set to decline in FY20: Economists

Economists at State Bank of India (SBI) Friday said states have managed to contain the fiscal deficit at the aggregate level for FY20, but expressed concerns over compression in capital expenditure. States have to resort to reducing capital expenditure, especially mid-way through the year, because of heavy burdens undertaken during the middle of the year like loan waivers, it said. Terming this as the problem of a "missing muddle", the economists said this is causing problems for the markets in its understanding of the fiscal math.

"The states could be advised to address this peculiar problem of missing muddle as it provides an inadequate and incorrect signalling device to market in terms of overall fiscal consolidation," they said in a note. The note cited the case of Bihar in FY18, where the state incurred a huge burden midway through the year, leading to the fiscal deficit being expanded by Rs 350 billion in the revised estimates. However, the final number came below the budgeted figure as well.

At an aggregate level, state budgets reveal an intention to reduce the fiscal deficit to 2.86 percent of the aggregate gross state domestic product (GSDP) in FY20 as against the 3.28 percent to be achieved as per the revised estimates for FY19. In FY20, only Odisha, Assam and Uttarakhand have budgeted for an increase in the fiscal deficit target as compared to the previous fiscal year, the note said, adding that the gap is still within the 3 percent level in all the three states.

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Apart from curtailing the capital expenditure, other factors helping states reduce the fiscal gap also include a healthy growth in the GSDPs. Other factor aiding in the sharp improvement in this parameter is the increase in GST collections being budgeted for by the states and also a reduction in revenue expenditure.