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States Fiscal Performance
States Fiscal Performance
States Fiscal Performance
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Key highlights
likely to result in significant future States need to streamline Positive for fiscal transparency,
fiscal cost alternative resources/improve although could impact fiscal space
efficacy of tax collections in states with higher off-balance
sheet spending
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States’ FY23 Fiscal Performance: Overall deficit reduced, interstate variations remain
States’ fiscal deficit narrowed to 2.8% of GDP in FY23 from an average of 3.4% b/w FY21-FY22.
• Out of the 19 states in our sample set, 14 undertook fiscal consolidation in FY23 vs. FY21-FY22 average.
• The narrowing in the fiscal deficit came on the back of both an increase in revenues and some compression in expenditure.
• To recall, fiscal deficit shot up in FY21 due to pandemic related spending and pressures on revenue collections.
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FY24: Higher fiscal deficit budgeted
States’ fiscal deficit is estimated to increase to 3.2% of GDP in FY24 from 2.8% in FY23. States with fiscal expansion plans and high debt are at risk
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Issue #1- Old vs. New Pension Scheme
After adopting NPS earlier Rajasthan, Chhattisgarh, Jharkhand & Punjab have shifted back to OPS in FY23. Himachal
opted more recently in April 2023.
Some other states like Maharashtra have also indicated to move to OPS.
OPS (Old Pension Scheme) NPS (National Pension Scheme) OPS (Old Pension Scheme)
Old New
Fixed.
Govt employees can opt for either 50%
Variable.
Payments to Retirees of last basic pay or average of last 10
Linked to market returns
months pay. This is topped up with a
dearness allowance
Eligibility Government employees Both- Private and Public
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Why OPS looks attractive to states & employees?
❑ Low near term expenditure: Under OPS, pension payments of ❑ Fixed pension payments- 50% of basis /average of last 10 month pay
retirees begin only after retirement, i.e. payments are deferred till
retirement ❑ More cash in-hand for employees- no monthly contribution
❑ Better cash flow: No monthly contribution under OPS by states ❑ No taxation on pension payments.
Pension Expenditure rose sharply after states implemented States re-opting for OPS have budgeted for lower pension payments
recommendations of 7th Pay commission in FY24
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Return to OPS: near term gain, long term fiscal pain
Savings
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Issue #2- End of GST Compensation Cess: likely to strain states’ revenue?
▪ States were compensated for the difference between the projected revenue ▪ As per the RBI, states with relatively high dependence on compensation cess
based on 14% annual growth with 2015-16 as the base year and the actual (Punjab, HP, UK) are likely be impacted.
GST revenue.
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Dissecting states’ revenue sources
States’ Revenue
An end to GST compensation cess is likely to put a strain on states’ revenues. They need to focus on increasing compliance, reducing leakages
and widening of tax bases.
Non-Tax Revenue 26.2 26.7 32.4 States’ reliance on grants (inc. GST
State's Own Non-Tax Revenue 8.9 8.6 8.0 compensation cess) from Central
Government has risen. Likely to come
Grants from the Centre 17.2 18.1 24.3
down as GST compensation cess ends
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Issue #3- Net Borrowing Ceiling (NBC): Aiming more transparency
Borrowings by state owned enterprises Off-balance Sheet ----On-balance sheet Impact on states
• State owned enterprises/SPVs increased borrowings • C.Govt directed states to shift off-balance sheet • Net borrowing limit fixed at 3.0% of GDP for FY24
since the pandemic. borrowings on state government’s balance sheet.
• Fresh borrowings to reduce by the balance sheet
• These are guaranteed by State Governments. • Liabilities incurred since FY22 to be considered. adjusted amount.
• While these borrowings aren’t reflected in states’ debt, • This is to be done over a period of four years, i.e. b/w
servicing burden (inc. principal) is borne by states. FY23 & FY26.
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FYTD Fiscal trends: Capex better than the last year
Revenue expenditure by states is in line with last year’s Encouragingly, capex has picked up pace in FY24. Revenue receipts collection is lagging behind last
trend. year’s trend.
Welfare spending by poll-bound states could led to an increase Andhra, Telangana, M.P., Kerala are driving states’ capex
in revenue spending
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Financing of the fiscal deficit
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States’ borrowing in FY24: Assumptions
States’ Borrowing
•Net market borrowings expected at 67.5% of FY24 fiscal deficit (INR 6.5 lakh Cr).
• With redemptions at INR 2.9 lakh Cr, gross market borrowings expected at INR 9.4 lakh Cr
•Rest of the deficit to be financed by loans from the Central Government, LIC, NABARD, etc, & Provident
Funds.
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States’ borrowing in FY24
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States’ Fiscal Health: Medium Term Risks & Positives
Issues Positives
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Treasury Economics Research Team
Disclaimer: This document has been prepared for your information only and does not constitute any offer/commitment to transact. Such an offer would
be subject to contractual confirmations, satisfactory documentation and prevailing market conditions. Reasonable care has been taken to prepare this
document. HDFC Bank and its employees do not accept any responsibility for action taken on the basis of this document.
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