While the Centre\u2019s fiscal consolidation path is set to continue in FY25, Indian states\u2019 fiscal consolidation path post-Covid looks like it\u2019s being interrupted, according to Emkay Global Financial Services Ltd (EGFSL)<\/p>\n
\u201cThere are some risks emerging in the convergence path of Centre and States\u2019 fiscal consolidation. The states\u2019 fiscal situation is at a risk of further divergence in FY25.\u201d <\/p>\n
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\u201cThe election-led populist spending by states is unprecedented and increases risk of fiscal slippage in FY25. This may also lead to a higher borrowing by states,\u201d said Madhavi Arora, Chief Economist, EGFSL<\/p>\n
The centre and states\u2019 fiscal behaviour has differed in the way they have achieved consolidation post-Covid, per EGFSL\u2019s analysis. <\/p>\n
\u201cCentre has overachieved on its revenue targets, allowing it to maintain focus on capex (capital expenditure) while cutting deficits. In contrast, states have consistently missed revenue targets, forcing them to cut expenditure, especially capex, sharply \u2013 even as their revex (revenue expenditure) growth has been higher than that of the Centre\u2019s. <\/p>\n
\u201cIndian states\u2019 fiscal consolidation path post-Covid looks like being interrupted in FY25. While the Centre has budgeted a 0.7% reduction in FD (fiscal deficit)\/GDP for FY25, States are budgeting a 0.2 per cent higher deficit, after having achieved a similarly higher deficit in FY24P,\u201d according to the analysis.<\/p>\n
\nElections: freebie schemes
\n<\/h5>\nEGFSL noted that the last couple of years have seen an evolution in fiscal behavior around elections, with this shift being far more apparent at the State level. <\/p>\n
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Of the 10 major states that went to polls in 2023 and 2024, nearly every state has introduced new freebie schemes, regardless of party lines, it added. <\/p>\n
This is not a completely new phenomenon \u2013 Emkay Global\u2019s analysis of 19 States over the last 20 years shows that on an average, states\u2019 fiscal deficit\/GSDP is 0.5 per cent higher during election years vs the previous year, with revex\/GSDP being 0.4 per cent higher, whereas capex\/GSDP declined by 0.1 per cent. <\/p>\n
\u201cThe worst offenders have been Chhattisgarh, Maharashtra, Bihar, Madhya Pradesh, Odisha, Jharkhand, and Andhra Pradesh \u2013 all States that have had or will have elections by end-2025,\u201d EGFSL said.<\/p>\n
States\u2019 FY25BE for subsidies has shot up to \u20b93.7 lakh crore on the back of the freebie wave \u2013 this is equivalent to 8.6 per cent\/8.7 per cent of aggregate revenue receipts\/ expenditure (the highest since FY21). <\/p>\n
Subsidies are budgeted to grow at 26 per cent Y-o-Y \u2013 while there is a base effect, freebie announcements have led to this rise.<\/p>\n
Arora said: \u201cWe reckon states will have to look for innovative avenues to mobilise their revenues better to improve their income profile so that they can spend without straining their balance sheet. The slippage in deficit will also lead to states borrowing heavily in H2FY25 (specifically Q4), especially for those states which are already facing fiscal pressure due to populist spending and revenue growth slowdown (Maharashtra, Himachal Pradesh etc).\u201d <\/p>\n
However, overall demand for sovereign debt will stay comfortable in FY25E despite nearly flattish supply, due to continued demand from long-only players like insurance, pension and PFs as well as robust FPI flows.<\/p>\n
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