States' fiscal deficit for FY24 expected near 3.1% of GDP
Citi Research has forecast that the fiscal deficits of states for the financial year 2023-24 (FY24) will align with the original budgeted estimate of 3.1% of the Gross Domestic Product (GDP). This prediction contradicts the revised figure of 3.5%. The projection is based on an analysis of 22 state budgets, which revealed slower growth in both revenue and expenditure than previously expected.
Six states project fiscal deficit exceeding 3.5% for FY25
The Citi Research study also disclosed that six out of the 22 states analyzed, have projected a fiscal deficit surpassing 3.5% for the financial year 2024-25 (FY25). This indicates a potential deviation from their borrowing limits. The report, titled 'India Economics, State Finances: A Tale of Capex, Grants and Borrowings,' underscores this trend among these states.
Decline in central government grants impacts state revenues
The report emphasizes a decrease in grants from the central government due to insufficient GST compensation funds and reduced finance commission grants. As a result, these grants, which used to constitute around 18-19% of total state revenues, are expected to drop to 15% for FY24-FY26. This reduction could potentially impact states' total revenue growth in FY25 and pose challenges for FY26.
States yet to achieve revenue surplus
Citi's study indicates that states have not yet achieved a revenue surplus at an aggregate level. The report estimates a revenue deficit of 0.2% of GDP for FY25, reversing the pre-pandemic trend observed in FY18 and FY19. An analysis of state data for 11 months of FY24 shows revenue growth at 10.5% and expenditure growth at 11.7%, both lower than the revised estimates of 17% and 21%, respectively.
Capex for FY24 to reach highest level since FY17
Regarding capital expenditure, Citi Research anticipates that states will fall short of their FY24 revised estimate target by approximately ₹500 billion. Despite this shortfall, the projected state capex for FY24, including Central loans, represents a significant increase from 2.5% in FY23 to an estimated 2.9% of GDP. The report concludes that the state capex for FY24 would be the highest level since FY17, significantly surpassing the pre-COVID average of 2.4%.
