States to follow centre, take escape clause to widen deficit in FY21

Sources in the government said that states have already pushed for higher deficit target for FY21 with the Centre and they have been told to toe the line taken by the it to raise their deficit by 0.5 per cent of gross state domestic product (GSDP) which is within their respective Fiscal Responsibility and Budget Management (FRBM) Acts.

Union Finance Minister Nirmala Sitharaman already used the escape clause in her February budget -- much before the Covid-19 pandemic -- after lower growth impacted government finances. Accordingly the FY20 deficit target was raised to 3.8 per cent of GDP from earlier 3.3 per cent. Also, FY 21 central fiscal deficit target has been revised to 3.5 per cent.

The need for breaching the deficit target by states is arising out of huge expenditure needs they have projected to deal with Covid-19 pandemic. Moreover, with central revenue also under stress, states expect to get a lot lower share from central pool of taxes. So a higher fiscal deficit will allow them to borrow more to meet the additional funding need in this period of crisis.

According to an analysis done by Motilal Oswal of the fiscal position of 18 states, eight states have already budgeted for a 3 per cent fiscal deficit of the GSDP or higher for FY21, Another five states have budgeted for a fiscal deficit of 2.5-2.9 per cent of their respective GSDPs. Only five states have budgeted for a fiscal deficit of less than 2.5 per cent of GSDP in FY21.

Of the states studied by the brokerage, only seven states have targeted a surplus on the revenue account and 10 states have outstanding liabilities of 24 per cent of the GSDP or more for this year.

What's more, for 10 states, the committed expenditure (interest, salary and pension payments) amounted to more than 53 per cent of the revenue receipts, as against the average of all states at 49 per cent, the brokerage noted in its report.

"The state finances of several states are under stress and Covid-19 will further their ability to consolidate financially while expanding deficit to meet additional fund requirement for the healthcare sector," said an analyst.

On an aggregate basis, all states spent only Rs 1.3 lakh crore or 0.73 per cent of GDP on medical and public health in FY18, amounting to 4.5 per cent of total spending by states. A study of 22 states and union territories (UTs) confirms that Delhi (DL) tops the list with the highest share of health spending (12.5 per cent of total spending), followed by Assam (AS) at 6.6 per cen per cent. Telangana (TS) and Andhra Pradesh (AP) spend the least (3.5 per cent of total spending) on health sector.

"As per our assessment, Punjab, Rajasthan, Kerala and Himachal Pradesh are the four most fiscally-stressed states. Three other states - West Bengal, Uttarakhand and Uttar Pradesh  - also have a tight fiscal position. In contrast, Maharashtra, which is the worst affected by COVID-19, had one of the best financial positions; Maharashtra had the lowest fiscal deficit and outstanding liabilities in FY19, second only to Odisha," the brokerage report said.