Hyderabad: Analyses of the budgets of 26 states showed that the aggregate fiscal deficit of these states for the next financial year has been estimated at 3 per cent of the state GDP, which is 40 basis points lower than the revised estimates for the current financial year ending this month. The data also showed that the fiscal deficit of these states is estimated to be within the range indicated by the 15th Finance Commission, a constitutional body.
Moreover, aggregate revenue deficit is also expected to be 0.2 per cent of the states’ GDP, lower than half a per cent of the states’ GDP which has been estimated for the current financial year.
"As a result, the quality of the fiscal deficit, which is measured by the revenue deficit as a per cent of the fiscal deficit, has improved," says Sunil Sinha, Principal Economist at India Ratings and Research, a Fitch Group rating agency.
Fiscal deficit of a government shows the overall borrowing requirement of the government in a financial year. A higher fiscal deficit reflects weakness in the government's finances, a lower fiscal deficit reflects in its finances.
According to Sinha, it also means that the loans to be taken by these states in the next financial year would primarily be used for capital expenditure and the focus on capex has remained intact.
An increase in capital expenditure, which is basically public money being spent on construction of roads, ports, highways, schools, hospitals and power plants, is considered crucial for achieving higher economic growth and employment generation. An increase in capital expenditure by states shows that they are also following the path of fiscal prudence.
Another indicator which helps in gauging the quality of public expenditure is capital outlay as a percentage of total expenditure (COTE). This ratio for 26 states has been budgeted at 15.9 per cent in FY25, same as the revised estimate for the current financial year. However, it is higher than 13.7 per cent recorded during FY18-FY20.
"The states' quality of deficit is budgeted at 7.3 per cent in FY25 which would be the best since FY19," Sinha said in a statement sent to ETV Bharat.
An analysis of the budgets of these 26 states showed that out of 26 states, 19 have budgeted an increase in their capital expenditure for the next financial year compared to the pre-pandemic average.
However, this is not true for all 26 states as the ratio of capital expenditure to their total expenditure has been projected to decline in states such as Bihar, Haryana, Himachal Pradesh, Karnataka, Mizoram, Punjab and Telangana.
However, all is not well with the state finances as they are not following a clear or predictable principle in managing their borrowings. The actual deficit of states has turned out to be much lower than what was projected in their budget.
