While the Centre’s fiscal consolidation path is set to continue in FY25, Indian states’ fiscal consolidation path post-Covid looks like it’s being interrupted, according to Emkay Global Financial Services Ltd (EGFSL)
“There are some risks emerging in the convergence path of Centre and States’ fiscal consolidation. The states’ fiscal situation is at a risk of further divergence in FY25.”
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“The election-led populist spending by states is unprecedented and increases risk of fiscal slippage in FY25. This may also lead to a higher borrowing by states,” said Madhavi Arora, Chief Economist, EGFSL
The centre and states’ fiscal behaviour has differed in the way they have achieved consolidation post-Covid, per EGFSL’s analysis.
“Centre has overachieved on its revenue targets, allowing it to maintain focus on capex (capital expenditure) while cutting deficits. In contrast, states have consistently missed revenue targets, forcing them to cut expenditure, especially capex, sharply – even as their revex (revenue expenditure) growth has been higher than that of the Centre’s.
“Indian states’ fiscal consolidation path post-Covid looks like being interrupted in FY25. While the Centre has budgeted a 0.7% reduction in FD (fiscal deficit)/GDP for FY25, States are budgeting a 0.2 per cent higher deficit, after having achieved a similarly higher deficit in FY24P,” according to the analysis.
Elections: freebie schemes
EGFSL noted that the last couple of years have seen an evolution in fiscal behavior around elections, with this shift being far more apparent at the State level.
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Of the 10 major states that went to polls in 2023 and 2024, nearly every state has introduced new freebie schemes, regardless of party lines, it added.
This is not a completely new phenomenon – Emkay Global’s analysis of 19 States over the last 20 years shows that on an average, states’ fiscal deficit/GSDP is 0.5 per cent higher during election years vs the previous year, with revex/GSDP being 0.4 per cent higher, whereas capex/GSDP declined by 0.1 per cent.
“The worst offenders have been Chhattisgarh, Maharashtra, Bihar, Madhya Pradesh, Odisha, Jharkhand, and Andhra Pradesh – all States that have had or will have elections by end-2025,” EGFSL said.
States’ FY25BE for subsidies has shot up to ₹3.7 lakh crore on the back of the freebie wave – this is equivalent to 8.6 per cent/8.7 per cent of aggregate revenue receipts/ expenditure (the highest since FY21).
Subsidies are budgeted to grow at 26 per cent Y-o-Y – while there is a base effect, freebie announcements have led to this rise.
Arora said: “We reckon states will have to look for innovative avenues to mobilise their revenues better to improve their income profile so that they can spend without straining their balance sheet. The slippage in deficit will also lead to states borrowing heavily in H2FY25 (specifically Q4), especially for those states which are already facing fiscal pressure due to populist spending and revenue growth slowdown (Maharashtra, Himachal Pradesh etc).”
However, overall demand for sovereign debt will stay comfortable in FY25E despite nearly flattish supply, due to continued demand from long-only players like insurance, pension and PFs as well as robust FPI flows.
