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Business News/ Money / Personal-finance/  States to keep spending conservative
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States to keep spending conservative

While the Centre plans to increase capital expenditure, states are expected to spend lower this year

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Over the last month, the central government and the states have released budget documents, and public sector enterprises (PSEs), their investment plans. Here are some observations that can have an effect on investors.

Centre funds to states

With the advent of the 14th Finance Commission (FC), there is a clear move to give more independence to states in deciding spending priorities. The government’s intentions can be read from the budget estimates. At first glance, the budgeted amount going to states is about 0.3% of gross domestic product (GDP) lower than that budgeted last year. But considering that the Centre’s tax revenues were much lower than anticipated, this year’s allocation remains broadly unchanged at 5.9% of GDP. What has increased though is the flexibility to states. The Centre’s transfers to states consist of untied funds (which the states can spend freely), and tied funds (strings attached). The 14th FC has increased untied funds while reducing tied funds.

Increase in public investment

Public investments are set to rise from both the Centre and the states. The Centre has proposed to increase capital expenditure for the central plan by 0.2% of GDP in FY2016. Based on documents of 17 states, it seems that capital expenditure for these states (weighted by their state GDPs), will be lower this year than last year (3.7% versus 3.9%). But they are also budgeting for current expenditure to fall, and that too by much more than in capital spending. The states are: Bihar, Madhya Pradesh, Rajasthan, Gujarat, Andhra Pradesh, Tamil Nadu, Chhattisgarh, Uttarakhand, West Bengal, Punjab, Jharkhand, Uttar Pradesh, Odisha, Maharashtra, Karnataka, Haryana and Kerala.

Last year, these states had started with assumptions of higher transfers from the Centre (6.2% of GDP) than what materialized (5.5%). This year, they are conservative in estimates.

PSEs are budgeting to increase capital spending by 0.38% of GDP, which is more than the Centre and state combined. This may be a good thing because of the three limbs of the government, PSEs are most able in rolling out capital spending.

Fiscal discipline

States have treaded cautiously in their budget documents. In fact, some states, which are already well below the Fiscal Responsibility and Budget Management target of 3% have reduced deficit estimates despite lower revenue projections. Also, 12 of the 17 states that released budgets after the Centre, too, have kept deficit targets the same as before. This gives confidence that the overall fiscal deficit of (all 29) states will remain at least at the same level (of 2.4% of GDP) as last year.

Market borrowing to remain unchanged

Data on net borrowing as percentage of GDP for 13 states suggests that it will be the same as last year.

As per budget documents, the Centre’s market borrowing (including repayments) are expected to fall to 4.3% of GDP from 4.7% last year. On the other hand, PSEs will be borrowing more this year in the face of higher investment. Overall, market borrowing by the public sector will remain controlled, at similar levels to last year.

But to understand what this means for growth, we have to look at the Centre’s desire to switch expenditure from current to capital outlays. In the Centre’s budget, there was a clear indication of reducing current spending while raising capital expenditure (capex). This can add an extra 0.14 percentage point to growth given multipliers for capital spending are higher than that for current spending.

Overall, despite marginal fiscal consolidation this year, an improved quality of expenditure is positive for growth.

Edited excerpts from an HSBC report, Tackling Four Myths.

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Updated: 15 Apr 2015, 07:05 PM IST
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