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Subdued capex and low tax revenue growth explain the poor performance of the rich states in December (Photo: Priyanka Parashar/Mint)
Subdued capex and low tax revenue growth explain the poor performance of the rich states in December (Photo: Priyanka Parashar/Mint)

States’ economic performance has gone south

Southern states hit the hardest as rich states continued to lose economic momentum in December, shows Mint’s State Economy Tracker

Wealthier states continue to be hit harder by the economic slowdown, shows the December update of Mint’s State Economy Tracker. Southern states, such as Tamil Nadu and Kerala, have slipped to the bottom of the ladder while medium-sized states, which includes Madhya Pradesh, Punjab, Odisha and Bihar, have made significant gains. Uttar Pradesh followed by West Bengal have retained their positions at the top.

The rankings, based on Mint’s State Economy Tracker launched last month, reflect the performance of state economies tracked across seven high-frequency indicators. The indicators encompass consumer demand indicators (vehicle sales, air passenger growth), financial metrics (inflation and credit growth), a barometer of industrial activity (power demand), and public finance metrics (public investments and tax receipts). The final state rankings are based on a composite score, which gives equal weights to each of the seven indicators. Most indicators reflect monthly growth over the year-ago period. In the case of vehicle sales and credit growth, the latest quarterly year-on-year growth figures have been considered. The public finance indicators reflect provisional year-to-date numbers, as reported by the Comptroller and Auditor General (CAG).

As questions emerge on whether or not the slowdown is bottoming out, subdued capex and low tax revenue growth explain much of the poor performance of the prosperous states in December. State’s own tax revenues, excluding state goods and service tax (SGST), has grown at a rate slower than the year-ago period for all states except Uttar Pradesh and West Bengal, the current leaders on the board. In Maharashtra and Gujarat, for instance, tax receipts slumped by more than 35% in December 2019. Meanwhile, in Andhra Pradesh and Telangana public capital expenditure fell significantly (a decrease of 65% and 13% respectively). For Kerala and Tamil Nadu, their slide down the rankings comes on account of a drop in power demand especially when power demand has picked up elsewhere. A year ago in December 2018, Rajasthan and Andhra Pradesh were ranked first and second respectively, but since then both states have plunged to the 6th and 8th positions), respectively.

(Graphic: Sriharsha Devulapalli/Mint)
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(Graphic: Sriharsha Devulapalli/Mint)

An enlarged version of this graphic can be seen here

The State Economy Tracker comprises 18 states divided into three categories: 10 large state economies (2017-18 GSDP exceeding 5 trillion); four mid-sized economies (GSDP between 3-5 trillion); and four small economies (GSDP less than 2 trillion).

Higher rankings in the state economy tracker have been driven by a combination of factors. Uttar Pradesh’s top ranking has been driven in part by consistent growth in air traffic, tax collections, and peak power demand. On average, the small and mid-sized economies have done better on all fronts when compared with the big states.

State economic performance could be further constrained by deteriorating financial health and shrinking central transfers.

Southern states, especially, are feeling hard done by because of delayed GST compensation and terms of reference of the 15th Finance Commission (FC). But neither the budget nor the 15th FC has addressed these concerns. The FC’s changes to the tax sharing formula has lowered the allocation for all the southern states, barring Tamil Nadu.

In the long run, the Centre-state financial tussle could create tension in India’s federal structure but, more immediately, it could jeopardize any economic recovery. If state finances are constrained, public investment could remain lacklustre, especially among the richer states. For the Indian economy, which relies more on its rich states, a speedy recovery will need the prosperous states to climb up the State Economy Tracker soon

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