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Some states have started to slip off their fiscal correction paths

Mint Mumbai

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October 31, 2024

Populist outlays and capital expenditure have widened their budget deficits. They must tighten up

- DHARMAKIRTI JOSHI & ADHISH VERMA

A synchronous improvement in the fiscal health of the Centre and states in the aftermath of the covid pandemic appears to have given way to divergence already. Staring at sizeable fiscal deficits, all had embarked on strict regimens to cut the flab from their budgets. However, recent data indicates many states have slipped on their fiscal fitness journey.

The divergence began last fiscal year. The Centre stayed on the fiscal consolidation path after the pandemic-led spike to 9.2% in 2020-21 and achieved a fiscal deficit of 5.6% of gross domestic product (GDP) in 2023-24, compared with a budgeted 5.9%, thanks to buoyant tax revenue, a large dividend from the Reserve Bank of India and restrained revenue expenditure growth.

States too saw their aggregate gross fiscal deficit decline from 4.1% in 2020-21 to 2.8% in 2021-22 and 2022-23, with revenue expenditure normalizing and revenue collection improving. But since then, the financials of several states have weakened.

The latest state budgets reveal vast differences in the budget estimates (BE) and revised estimates (RE) of the key fiscal parameters of states in 2023-24.

For instance, the fiscal deficits of nine of the 18 non-special category (NSC) states analysed overshot their budget targets. Of these nine, the revenue of four was below target, while the expenditure of five exceeded the target. Of the remaining nine, five cut their expenditure in the face of lower revenue to contain their fiscal deficits.

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