Profit Insights | With general elections around the corner and an eventual Union budget, how will these two events impact state budgets? NDTV Profit's Pallavi Nahata decodes the fine print of state budget data and how it will pan out post elections.
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00:09 Hello and welcome to NDTV Profit.
00:11 You're watching a special show on state budgets.
00:15 Now, given the emphasis on the union budget every single time around,
00:20 even if it happens to be an interim budget or a vote on account,
00:25 while that's understandable,
00:27 often the emphasis on state budgets is a lot lesser.
00:32 State budgets continue to remain extremely significant
00:36 from all perspectives in terms of fiscal deficits,
00:40 borrowings or their capex outlay.
00:43 So today's show is essentially a special
00:46 on trying to understand what's happening in terms of state budgets.
00:50 And for that, I'm in conversation with Paras Jasrai
00:55 from India Ratings and Research.
00:57 Paras, thank you so very much for taking time out
01:00 for this special show with us today.
01:03 Thanks. Thanks for having me.
01:06 So, you know, before we can begin,
01:08 I'd just like to take the viewers through some quick key takeaways
01:13 from some of the research that you've put together on the state budgets.
01:18 Now, according to an analysis of state budgets by India Ratings and Research,
01:23 aggregate fiscal deficit for FY25 has been budgeted at 3% of the GDP.
01:29 That's a notch lower than 3.4%,
01:32 which was the figure that's coming in from the revised estimate of the state budgets.
01:38 This is, of course, the 26 states which have presented full budgets for FY25.
01:45 Now, even the revenue deficit has been budgeted a tad lower at 0.2% of the GDP,
01:52 down from about half a percent of the GDP as per revised estimates for FY24,
01:58 which essentially indicates an improvement in the quality of spending.
02:04 Another indicator which helps in gauging the quality of public expenditure,
02:08 capital outlay as a percentage of total expenditure,
02:12 has been budgeted at about 16% for the year FY25,
02:17 broadly in line with FY24.
02:19 So we'll, of course, be discussing more of this in the show.
02:24 But, you know, Paras, to start with, with the fiscal deficit, for instance,
02:30 what is the key takeaway when you look at the state budgets?
02:35 Of course, even within states, there does seem to be a fair degree of variability.
02:40 I believe Bihar, for instance,
02:44 its revised estimate for fiscal deficit is actually at 8.9% of the GDP,
02:51 versus the figure it had budgeted of 3% of the GDP.
02:55 And for FY25, the state is once again budgeting 3% of the GDP,
03:00 making us, you know, at least at the forefront,
03:05 question the significance and the validity of these figures going forward.
03:10 But what are you broadly making of the states on an aggregate?
03:13 And any light you'd like to throw on some specific states like Bihar, for instance?
03:18 Yes, sure. So as you mentioned correctly,
03:21 that the quality of deficit of the states as input and the way to gauge that is
03:26 taking a proportion of revenue deficit as a proportion of the fiscal deficit.
03:31 And fiscal deficit is basically the amount of total borrowing that the states in aggregate or individual states do.
03:37 And a lower number on that front indicates that a higher chunk is
03:42 diverted towards capital expenditure. And in FY25, that ratio stands at about 7.3% in FY25.
03:50 So that is, and to give a brief context, it was around 25% during the pre-COVID period of FY20.
03:59 So this shows that there has been a continuation of focus from the policy perspective from the states in terms of like spending more on CapEx.
04:08 We witnessed and saw that in FY24 and the same trend has been continued in FY25,
04:14 which is a very positive development in terms of policy consistency from states was focusing more on CapEx.
04:21 So that is one. Another good point has been that because of the compliance-led measures
04:28 and the better than expected economic recovery by the states,
04:32 many states have undertaken various measures like,
04:35 for example, Punjab and Kerala have undertaken specific measures by introducing a tax research center unit within their own states.
04:44 And that has, like for Punjab for that matter, their own tax revenue growth has been involved.
04:50 And if you look at the overall own revenue growth of the states,
04:54 so that has been busted at a good level. To give a number specifically,
05:00 it would be around 7.9% of GDP in FY25 for the states.
05:05 And that is a very positive development. Though we have seen that states tend to be a bit more optimistic on their own revenues,
05:14 whenever they present their budgets, that just turned out to be quite low.
05:17 But the broader point has been that compliance-led measures and the way the economic recovery has been,
05:24 states have been getting higher revenues.
05:26 And that also has meant that their dependency on the central government in the form of grants and tax revolutions has also slightly gone down,
05:33 if you compare to the pre-COVID. So that's the second trend.
05:36 And within CAPEX, what we have witnessed specifically for various states is that there has been an enhanced focus on social services.
05:50 So social services includes your medical and public health and education services, etc.
05:57 So to give it in a perspective, around 22% of the overall CAPEX of the states was channelled towards social services in the pre-COVID level.
06:07 But right now, what we have witnessed post FY21, specifically from FY23 onwards,
06:14 that ratio has gone up to around 32% on an average. And that continuation is there even in FY25 as well.
06:23 So that indicates that the states focus on overall human development, which is a very important factor.
06:31 For various states, I can give some examples of differences as we move further in our discussion.
06:38 So that's some briefly speaking of the overall perspective from the budgets.
06:43 Now, just coming on the numbers for Bihar. Bihar tends to have a very high…
06:51 their numbers, what we also have put out in a separate report in a detailed manner for Bihar,
06:59 was that Bihar tends to have a very significant difference in terms of what it puts out in actual,
07:05 and what is there in the budget estimates and even in the revised estimates.
07:09 So to give it a number, I think in FY23 revised estimate also the overall fiscal deficit was around 11%.
07:19 And if you see in FY24, as you pointed out, it was around 8 or 8.5%.
07:24 But the actuals turned out to be much lower. And the reason for that is that Bihar tends to get a very larger jump,
07:31 about 70% of its revenues from the central government. And within that, a very large share is that of grants.
07:40 And what we have witnessed from the state is that they tend to put out a higher number for the grants in terms of the budget,
07:48 but they are not able to get that amount in the actuals.
07:52 And partly, part of the reason is also that states tend to be…
07:57 state of Bihar has administrative capacity in terms of spending that amount of money as well.
08:02 And because of that, the overall revenue expenditure also goes down than what they put out in the budget.
08:08 And that's why their overall numbers do look very different when you look at the actuals,
08:14 two years down the line when our budget…
08:17 Right. So that's a great summary. Thank you so much for that.
08:21 But, you know, like we've mentioned Bihar specifically in terms of the variability and volatility in their fiscal deficit,
08:30 but generally on a lot of these parameters. So, for instance, even on Capex growth,
08:35 we're seeing Bihar again budgeting Capex to contract by nearly about 25 odd percent,
08:43 while at the other end of the spectrum, states like Gujarat are expected or at least budgeting
08:49 almost a growth of 30 percent on their Capex outlay.
08:52 So I'm just trying to understand, you know, the kind of volatility that we see in the estimates put out by the states.
09:02 Is that problematic? One would obviously not expect to see that much of variability in a union budget.
09:09 But in case of states, is this the norm? Is that something you're used to seeing by now?
09:15 And is that also a challenge?
09:19 Yes, there is a lot of amount of variability, heterogeneity in the way the states tend to spend.
09:27 And that depends on the development of the state, each of the states.
09:31 So if you compare a state like Gujarat with Bihar, then Gujarat is amongst the high-income states of India
09:38 and Bihar is on the other hand, on the opposite side of the paradigm. And that's one point.
09:45 So if you see within Gujarat also, there has been like Gujarat has been like for previous years also,
09:52 has been lagging on human development indicators and whether it's the birth rate, death rate, etc.
09:57 But now what we have witnessed, and it's a very notable positive development within the state,
10:03 is that the state is now focusing more on within CAPEX on social services, as I pointed out earlier,
10:10 for the overall states. Gujarat is among one of the states where there has been a shift in focus
10:15 in terms of putting on new medical colleges or hospitals or schools, etc.
10:21 So that is a very positive development from the state's overall development stage as well,
10:28 although the state is high-income state, but it fares slightly lower in terms of human development indicators.
10:34 And Bihar, on the other hand, has a problem of administrative capacity in terms of spending.
10:41 And that is again visible in the way they do capital expenditure or revenue expenditure as well.
10:49 Within revenue expenditure, it's more focused more on the development side,
10:53 which is more on social services and economic services. But CAPEX on that front,
10:59 there has been a trend that compared to the pre-COVID level, they are spending lower on CAPEX.
11:08 Okay. So a couple of things I did want to ask you was firstly about borrowings.
11:14 State borrowings appear to be at an all-time high.
11:18 That and the fact that, you know, generally the general government debt, state and the center combined,
11:26 remains fairly elevated in India this time, despite the center budgeting slightly lower borrowings.
11:34 This has been an ongoing challenge for the Indian economy.
11:38 So even though at this stage it's too early to be able to determine what is the sum of the state and the central debt put together,
11:50 there is clearly a trend of rising borrowings in the states. Right.
11:55 Also, are there any particular states you'd want to talk about where borrowings has been high,
12:01 affecting in turn the interest outgo and the quality of expenditure by these states?
12:08 Yeah, sure. So as you pointed correctly, I mean,
12:11 the union government has budgeted a moderation in the borrowings, gross borrowings in FY25.
12:17 But on the other hand, we have seen the states like budgeting 10.2 trillion target of borrowing from the market.
12:27 And this is at a record high. And specifically within that, if you see states like Tamil Nadu,
12:35 Tamil Nadu is the largest amongst all the states which borrow around 1.1 lakh crore.
12:43 And there are other states as well, which like Rajasthan, over the years have increased their market borrowings quite significantly.
12:52 And right now it's around 750 billion, 757 billion. And then again, if you see UP,
12:59 UP also has a very high, fairly high borrowing department. And same is for Karnataka and Maharashtra.
13:06 Maharashtra is I think budgeted around 960-950 billion of gross market borrowings in this fiscal.
13:15 So broadly what we have seen is that quite a higher, I mean,
13:19 significant chunk of states are budgeting a record amount of borrowings from the market.
13:25 And even if one looks at their FY24 RE numbers, there also what we have witnessed is that the borrowing is currently at 9.6 trillion,
13:36 which is slightly higher than what they had initially budgeted out to be 9.2 trillion.
13:42 So that is one thing. But the good thing is that all of the borrowings that the states are doing,
13:48 that is like channeled mostly towards CapEx, which is a good thing, as I explained earlier as well.
13:55 And that is a continuation of that in terms of like consistency in spending on CapEx and a very dedicated focus on that.
14:05 That is a very good thing in terms of long-term economic growth of the various states.
14:10 And they would reap benefits of that because the research also shows that a 1 percentage point increase in the capital outlay leads to about 80 basis point jump in the GDP growth of the states.
14:24 So that is one thing that underlies the importance of CapEx. So that is there.
14:29 In terms of the debt servicing ability, a key issue on that front is the interest rates to revenue receipts ratio,
14:37 which basically indicates that out of whatever 100 rupees that the states are getting as revenue,
14:44 how much of that is going towards paying down the previous year's borrowings.
14:50 So on that front, in aggregate, states are much better than the pre-COVID level.
14:55 Now, right now, it is around 12.4 percent, while in the pre-COVID level, if you look at the average of 2018 to 2020, it was around 12.9 percent.
15:04 And there are various states which have seen a very massive improvement despite having a very high level of debt.
15:11 Some of the couple of states such as Punjab and West Bengal are an example in that.
15:16 And there are states which already had a very high ratio in terms of being at 20 percent level.
15:24 There, the ratio has increased. A higher number basically indicates that a larger chunk of the revenue receipts is going towards interest payments.
15:32 So that has been the case for Tamil Nadu and Haryana and I think Kerala as well.
15:38 So these are the three states which already had a very high level of debt servicing ratio, but that has gone up in the post-COVID period in FY25.
15:47 Earlier on in the conversation, you spoke about how there has been an uptick in welfare spending among states,
15:56 especially states like Gujarat, where the state was possibly lagging until some time back.
16:01 But even broadly, when we talk about welfare spending, can you help explain where this amount is being spent?
16:10 I believe some of the verticals are health, education. It's a trend we've possibly seen post-COVID, the uptick in social welfare spending.
16:19 And I did want to ask you about spending on schemes for women as well.
16:24 In the case of quite a few states, there seems to be a renewed focus on targeted spending on schemes which benefit women.
16:35 Would that be correct to say?
16:38 In terms of specific states, yeah, I mean, we have seen that Delhi or Himachal Pradesh or Karnataka,
16:49 other states mostly have been doing that amount of welfare spending in terms of giving a higher amount of income support to a different set of populations.
17:01 So to a certain extent, for some states, it is good.
17:06 I mean, if you see for Karnataka, even though they have done that in terms of higher social services spending within their own revenue expenditure,
17:15 which basically leads to amounts to a higher amount of income support.
17:20 So if you see that and look at the fiscal ratios, they have done all of that, keeping the ratios within the potential.
17:30 Their fiscal deficit is around 3% of GDP, which is what is indicated by the 15th Finance Commission.
17:39 So given the space that they have, they have done that.
17:44 The state has that amount of discretion in terms of where it does want to do.
17:49 And we believe that is a demand-supporting initiative measure that the state has undertaken.
17:57 And that is also important because currently what we have also seen is that private finance consumption expenditure is also something which is facing some bit of moderation.
18:07 And that has been there.
18:09 And to give some perspective, I think PSCA growth was around 3% in FY24, which is the second-hand wealth estimate.
18:18 So that shows that there is a consumption demand problem in the economy that we have been also highlighting.
18:24 And there, if you see some states which are doing that, that is a very positive development.
18:30 And in terms of the higher capital expenditure towards social services, they have been like, Gujarat is one among them.
18:41 And then if you see for Jharkhand as well, Jharkhand lacks quite significantly in terms of their social infrastructure when compared with other states.
18:50 And they are also now not only focusing more on capital outlay.
18:54 If you give a number, around Rs.20 out of every Rs.100 that they are spending is going towards CapEx, which is at a 17-year high.
19:05 So that shows that the state's focus on capital outlay has been, CapEx is definitely there.
19:11 And within that, the ratio for social services is also at a very, over a decade high.
19:18 So that is a very positive development. And same trend we have seen for states like UP and other also states, which is a positive development as I explained earlier.
19:30 Okay. You know, in case of some states like Andhra Pradesh or Telangana, a fairly large share, maybe I think about 2-3% at one point of the state GSTP was being diverted for freebies.
19:46 Is that a trend we're still seeing among states? Or do you think that too, as a trend has declined across states?
19:54 In terms of, so one thing is that Andhra Pradesh and Telangana have presented a vote on the count.
20:02 And there are like some of the states which have presented a vote on the count.
20:06 That caveat is definitely there in terms of analyzing the budget specifically for the states because a new budget will be presented when a new government is there.
20:17 But on other welfare spending front, what we have seen is that Andhra Pradesh and Telangana broadly have been focusing on social welfare spending.
20:27 And if you see their overall GSTP growth also, not only they are very high in terms of their overall income levels, but their GDP growth,
20:39 the respective GSTP growth of the states are being fairly good about 7% and even for Andhra Pradesh that is there.
20:46 And Andhra Pradesh definitely has a recurring revenue deficit problem.
20:55 After the bifurcation of the state, they have been on the revenue deficit side.
21:00 So that basically constrained their fiscal capacity as well.
21:03 But from FY 2024 onwards, what we have seen is that given the limited fiscal space that they have,
21:09 they have also focused more on CapEx and in the 10 months of data that we have,
21:16 we have seen that the capital expenditure by the state has been good in double digit growth that has been there on a sustained basis, which is a positive thing.
21:24 And there the central government's support also has been quite instrumental in the states also putting a growth which is around 30% in terms of capital expenditures.
21:38 That is it.
21:39 Okay.
21:40 Okay.
21:41 So considering we're out of time, one quick question to round up the conversation today.
21:46 And a lot of states have been talking about a $1 trillion economy, Maharashtra being one of them, Uttar Pradesh being another.
21:55 And while these are, of course, ambitious targets set out with roadmaps which span into the next decade or so.
22:05 But what is it looking like to you?
22:08 I mean, would you read anything at all into these targets?
22:12 What's the indication, if any, coming in from state budgets?
22:18 In terms of these $1 trillion targets, I mean, it's on the lines of what the center also has put out in terms of like a $15 trillion target or $30 trillion target by 2047.
22:34 So broadly it has been on those front like you see states like Tamil Nadu, Maharashtra, Gujarat or even Karnataka also putting out those things.
22:43 And in terms of targets, it's also good, but it's also important to keep in mind that it's very tough to have that sustained growth because we recently did a study also.
22:55 It was published in the last month.
22:59 And we had looked at the overall targets in terms of whether the economy would be reaching upper middle income category by 4 years.
23:08 So we found that around the economy has to grow in currency or USD dollar terms, about 9.7% on a sustained basis from FY24 onwards.
23:18 If it wants to reach upper middle income category by FY33 or FY36.
23:25 And our calculations basically show that broadly we would be reaching a level which is on a higher trajectory considering the growth that we have been witnessing.
23:39 And definitely if you drill down to different states, then Maharashtra and like the high income states would be there.
23:46 But given the fact that various states are doing higher capital outlay, you see Madhya Pradesh has been a very instrumental or a key state because earlier it used to be not even in the top 10 list of high income states.
24:01 But now what we have seen that their share in the overall GDP has like even gone beyond Kerala.
24:08 So that is a good thing in terms of higher GDP growth and higher focus on capital outlay.
24:14 So the states tend to do that and do it in a very efficient manner by not like backloading it to the last spot.
24:23 Then definitely we would have a higher growth for different states and consequently for the Indian economy as well.
24:29 And that is a positive thing to look out for.
24:32 Okay, great. Thank you so much for taking time out.
24:36 We're completely out of time.
24:38 But this was an extremely interesting conversation.
24:41 And thank you so much once again for helping us break down state finances and come up with these broader takeaways.
24:49 Stay tuned to NDTV Profit.
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