States not fixing their fisc despite higher transfers
With the states getting more untied funds from the central government, and the Centre, in turn, reducing its contribution to various schemes, it has become critical to look at both central and state budgets together, both from the point of view of the deficits as well as from the point of view of capital spending. Though a problem with state government budgets is that a consolidated picture is not available till the next year, Chief Economic Advisor Arvind Subramanian had attempted to come to an estimate some weeks ago after examining the budgets of 17 states that account for more than 80% of the expenditure by all the states. His conclusions were, taken together, the general government fiscal deficit was all set to fall from 6.9% of GDP in FY15 to 6.5% in FY16 and, within this, capital expenditure was budgeted to rise from 4.6% of GDP in FY15 to 5.1% in FY16. In other words, the fiscal compression would create more room for monetary expansion and the shift towards capital expenditure would also help create more capacity and would therefore also be anti-inflationary.
This view has been contested by the economists at both Nomura as well as JPMorgan. According to a research note by Nomura, there is little fiscal consolidation taking place at the level of the states—Subramanian says this will compress from 2.8% of GDP in FY15 to 2.5% in FY16—and the quality of spending is also not likely to be very different from that in earlier years. According to an article written in this newspaper by JPMorgan economists Sajjid Z Chinoy and Toshi Jain, the problem arises from the belief that the budget estimates are going to be close to the revised estimates. In certain states like West Bengal and Rajasthan, for instance, there has been a large divergence between the estimates and the actual—West Bengal had projected a 1.9% fiscal deficit in FY15 as compared to the actual of 3%. Given the low levels of capacity utilisation, it is unlikely an overall expansionary fiscal stance—assuming the private sector economists are correct—will cause inflation, indeed it will help create a demand momentum. What is of more concern, however, is the picture on capital expenditure. With private sector balance sheets in disarray, the chances of a private sector-led capital recovery are bleak. Which is why it is important that both the Centre and the states try and fund as much capital expansion as possible both through their PSUs as well as through agencies like the NHAI and the Railways.