State Finance Ministers have it quite easy as far as media reporting of their Budget presentations go. There is extensive analysis of the Union Budget, often bordering on needless hair-splitting, with media organisations preparing for months for the big day. But when it comes to State Budgets, the reporting is restricted to the budget speech and the salient points handed to the media.
This soft-touch reporting is not because the journalist fraternity is not interested in State Budgets or because they are more considerate about the feelings of the State Finance Ministers. The reason why State budgets are not subject to similarly intense scrutiny is because, the budget documents of most States are presented in formidably unfriendly formats.
Many States put out the key documents including the budget speech in Indian languages with minimal information in them. Often, the budget documents contain just the revised estimates for the previous fiscal year, and not the budget estimates, making it difficult to evaluate the performance against the previous year’s budget.
All this could be ignored if the budget was prepared meticulously in a conservative manner, sans political influence. But that does not appear to be the case. Recent businessline Analysis showed that the nominal GSDP projections made in the Budgets for FY24 of many States, was quite irrational.
These higher growth projections provide room to project higher revenue, which gives States the space to spend more. But the concern is that as the revenue fails to meet the targeted amount, States will either record a higher fiscal deficit and borrow more or cut back on their capex, both of which are not good for the economy.
Irrational projections
The nominal GDP growth projected for the Budget year is among the critical numbers in the Budget and therefore analysed threadbare. But many States have projected GSDP growth which appears stiff given the current conditions.
According to a businessline story “Are States such as Tamil Nadu and UP over-ambitious about FY24 growth?”, while the Centre has projected 11 per cent nominal growth for FY24, Uttar Pradesh is projecting GSDP growth of 19 per cent, Tamil Nadu, 14 per cent and Gujarat 13 per cent.
Of the top 10 States, six are projecting growth rates that are higher than the Centre’s. These numbers are not only out of sync with the average growth rates in the respective States over the last five years, but they are also not factoring in the challenging domestic and global environment prevalent now.
One, the nominal growth in FY23 received a boost due to high inflation. With CPI inflation moderating this year, nominal growth too is expected to move lower.
Two, the central bank’s rate hikes are beginning to impact consumption and private investment, which can drag growth. Three, continuing challenges in the global environment will weigh on exports and manufacturing this year too.
The higher GSDP projections are leading to inflated revenue projections for FY24, which most economists are terming as ‘unachievable’.
Uttar Pradesh is projecting its own tax revenue to grow 42 per cent higher this year compared with the revised estimates for FY23.
Rajasthan (23 per cent), Andhra Pradesh (22 per cent), Tamil Nadu (19 per cent) and Telangana (18 per cent) are some of the other States which are being too optimistic about growing their own tax revenue this fiscal year. The Centre, in contrast is projecting tax revenue growth at only 12 per cent in FY24.
According to Emkay Research, States are projecting a tax buoyancy of over 1.5 for FY24, whereas the Centre is projecting a tax buoyancy of around 1. Typically the tax buoyancy in States is much lower than the Centre. The report also points out that some components of States’ own tax revenue could be lower this year. For instance revenue from stamp duties can be lower as rising interest rates impact consumption. Revenue from vehicle tax will also be lower as the post-Covid boom in demand for vehicles abates.
Further, with GST compensation cess having been phased out, States which were greatly dependent on this source of revenue such as Punjab, Himachal Pradesh, Uttarakhand and Bihar will see a steep decline in their revenue.
It’s not difficult to see that political pressure is behind these expanded revenue projections. With the Lok Sabha elections coming up in less that a year and States such as Chhattisgarh, Madhya Pradesh and Rajasthan to hold Assembly elections in the coming months, there will be compulsions to spend more to win over the electorate.
But exaggeration in revenue projections mean that the State fiscal deficits will expand with expenditure likely to remain elevated. States have budgeted to borrow ₹9.5-lakh crore in FY24 on a gross basis, according to ICRA. These numbers will be exceeded as revenue falls short of the Budgeted figures.
The problem is that States are not allowed to let State fiscal deficit to exceed 3 per cent of their GSDP, as laid down by the Fifteenth Finance Commission. In order to keep the deficit and borrowing in check, States will try to cut back on their capital expenditure. This will roil the improvement in the quality of expenditure in States, observed during the pandemic.
RBI research has shown that the revenue expenditure to capital outlay ratio of States was at a multi-year low in 2022-23. This is quite likely to deteriorate this year. While the interest-free long-term loan from the Centre will help to a certain extent, it may not be enough.
More data please
All this boils down to stipulating State governments to be more generous in sharing data on the State financials and State Budgets with the media and other stakeholders.
A uniform template for State Budgets in an easy-to-download format will not only make analysis easy, but it will also increase the scrutiny on the management of State finances, which will be beneficial to everyone in the long run.
This will make State Finance Ministers think twice about before making unachievable projections and hiding them in inscrutable documents.
UP, Rajasthan, Andhra Pradesh, Tamil Nadu and Telangana are some States which are being too optimistic about their tax revenue growth for this fiscal year