States cut development expenditure to shore up finances

While all indications point to the Centre slipping up on its fiscal deficit target for the current fiscal, the States seem to be doing a much better job on consolidating their finances.

So much so that States, according to RBI estimates, could report a surplus on the revenue account this fiscal after remaining in deficit during 2009-10 and 2010-11.

Importantly, the broad trend towards fiscal consolidation by States is expected to come about mainly on account of a dip in growth in their revenue expenditure. This is, according to the RBI, attributable to a “sharp decline in development expenditure growth, specifically in case of social and economic services”.

Interestingly, this comes at a time when higher spends by the Centre, especially for programmes under the social sector head, are expected to push the Union Government's fiscal deficit for the current fiscal from the projected 4.6 per cent to around 5 per cent or higher. A decline in revenues on account of a broader economic slowdown and higher spends on subsidies are also listed as key contributors to the Centre overshooting its fiscal deficit target for 2011-12.

According to analysts, the divergent trend on development spends could actually indicate that States might be clamping down on their own development expenditure in the face of higher spending by the Centre under precisely this head.

RBI estimates, based mainly on budgetary projections, point to States carrying forward the process of fiscal consolidation in 2011-12, with the revenue account is expected to turn into surplus after remaining in deficit during 2009-10 and 2010-11, while the GFD-GDP (gross fiscal deficit to gross development product) ratio is expected to decline further. “Overall, the States seem to be committed to bringing their finances on a sustainable path in the medium-term, which has led to better consolidated deficit numbers,” the recent central bank note says.

The consolidated fiscal deficit (including off-budget liabilities) relative to GDP had been brought down from 10.6 per cent to 9.4 per cent in 2009-10 and further to 7.6 per cent in 2010-11. The consolidated fiscal deficit for 2011-12 is budgeted at 6.7 per cent, of which the Centre's deficit is pegged at 4.6 per cent and states' deficit is estimated at 2.1 per cent.

Any slippage on the fiscal gap target has the potential of worsening the country's inflationary problem and choking private investment. The fiscal deficit is the difference between the Government's (Centre or States) total spending and its revenues, which include non-debt capital receipts.

Most economists project that the Government is likely to close the current fiscal with a deficit of 5-5.5 per cent of GDP. Citi in its flash report released earlier last week had said, “Given trends in revenues and expenditures, we maintain our view of a minimum slippage in the deficit to 5.1 per cent of GDP. This could rise to 5.8 per cent if the Government does not defer the under-recoveries payment to the oil companies”.

COMMENT NOW