Why has fiscal deficit of state governments not risen?

  • State governments can spread out the waiver over a few years, without pressuring the fiscal deficit in one year
  • Since 2016-17, the fiscal deficit of state governments has come down a little

When economists talk about fiscal deficit, they typically refer to the central government figure. But states governments also run a fiscal deficit, which, when added to the central deficit, is a substantial figure. Mint delves into the fiscal deficit of state governments.

How high is the fiscal deficit of state governments?

Fiscal deficit is the difference between what a government earns and what it spends. In 2011-12, the total fiscal deficit of state governments was 1.71 trillion. This amounted to just 33.3% of the fiscal deficit of the central government during that fiscal. In the next few years, state governments ramped up their spending. In 2013-14, the fiscal deficit of state governments was around 50.2% that of the central government. In 2016-17, the figure zoomed to 5.36 trillion, or just a little over 100% of the fiscal deficit of the central government during that fiscal.

What is the situation this fiscal?

Since 2016-17, the fiscal deficit of state governments has come down a little. In the current fiscal (2018-19), the figure is expected to be 4.9 trillion, or around 77.3% of the fiscal deficit of the central government. The interesting thing is that, on the whole, the situation seems to have improved. In 2016-17, the total fiscal deficit (central government plus state governments) was at a very high 6.97% of gross domestic product (GDP). In 2018-19, this is expected to fall to 5.90% of GDP. However, the question is how this is even possible, considering that several states have waived off agricultural loans.

What is the total amount of farm loans waived off by state governments?

An estimate by CARE Ratings suggests that agricultural loans worth 2.2 trillion were waived off between April 2017 and December 2018.

How does a loan waiver impact a state government’s finances?

In the recent past, newly elected governments of Chhattisgarh, Madhya Pradesh and Rajasthan announced farm loan waivers worth 62,000 crore. When a government waives off farm loans, it needs to compensate banks that gave the loans to the farmers. This pushes up its expenditure, which, in turn, should push up the fiscal deficit, unless some other expenditure is cut. When politicians announce a waiver, they do not mention the period within which it would be implemented.

So, how have state governments kept the fiscal deficit under control?

As no timeline was announced for the loan waiver, state governments can spread out the waiver over a few years, without pressuring the fiscal deficit in one year. The central government has also managed to control its fiscal deficit by deferring the payment of subsidies to the Food Corporation of India and fertilizer firms. Also, several capital expenditures of the central government are now kept outside the budget.

Vivek Kaul is an economist and the author of the Easy Money trilogy. 

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