As per the FRBM act,
the fiscal deficit of the state governments is supposed to be less than 3% of
the GSDP of the states. Is the fiscal deficit of the state governments under
control? How are states financing the fiscal deficit? Here is an explainer.

constitution declares India to be a ‘Union of States’, with the states having powers
in respect to executive, legislative and financial matters. Chapter I of Part
of Indian Constitution lays down the laws regarding Financial matters
of the Union of States. Various articles provide for a certain degree of
autonomy to the states to deal with its financial matters.

For e.g., Article 282 provides for
financial autonomy in spending the resources available to the states for public

Fiscal Deficit of State Governments_Misc Financial Provisions

The Central
government’s decisions have a significant bearing on the economy of the country,
through its policies, taxation rules, spending etc. Similarly, even the state
governments have an influence on the state economy through state level
taxation, favourable policies for economic growth etc. which in turn has an
impact on the national economy.

Factly had
earlier published an article about India’s
Fiscal deficit. In this story we look into the fiscal deficit of Indian States.

Lesser Fiscal
Deficit estimated for 2019-20 for states compared to previous year

As per ‘State Finances
A Study of Budgets of 2019-20 Report
’, released by
RBI recently, the budget estimates forecast the fiscal deficit
of the states
at ₹ 5.52 lakh crores for the year 2019-20. This constitutes
2.6% of the GDP.

The Budget
estimate for fiscal deficit of states in 2018-19 was ₹ 4.90 lakh crores which was 2.4% of GDP. However, the fiscal deficit estimate
for 2018-19 was revised to ₹ 5.55 lakh crores which
is 2.9% of GDP.

One of the
targets set as part of the Fiscal
Responsibility and Budget Management Act, 2003
was to limit the Fiscal
to 3% of GDP. Over the past 15 years, with the exception of 2015-16
& 2016-17, the Gross Fiscal Deficit (GFD) of the states remained at less
than 3% of the GDP.

In 2015-16 the
GFD was 3.1% which increased to 3.5% in 2016-17. It however fell to 2.4% as per
the actuals for 2017-18.

Fiscal Deficit of State Governments_GFD of states as percent of GDP

performance in respect to GFD not consistent across the states

Over the
four year period, the performance
of each state
in respect to GFD as share of GSDP ( Gross State Domestic Product) has
been varied.

which reported a GFD of 12.4% of GSDP in 2016-17 was able to cut down GFD to
2.6% in the next year. The revised estimate for 2018-19 puts the fiscal deficit
at 3.4% and the budget estimate for 2019-20 puts it at 3.4% of GSDP in the case
of Punjab.

On the
other hand, Arunachal Pradesh which reported a surplus in 2016-17 (-4.3% of
GSDP) has estimated the GFD for 2019-20 at 2% of GSDP.

  • Telangana, Rajasthan, Jharkhand and Tamil
    Nadu among states which have reduced their GFD over 4 years.

from Punjab, there are other states which have managed to reduce their GFD as
share of GSDP since 2016-17. Tripura had a GFD share of 6.1% which was
gradually reduced, to an estimate of 2.8% for 2019-20. The revised estimate for
2018-19 is 2.1% of GSDP.

Among the
larger states, Telangana showed consistent improvement where in the GFD which
was 5.3% in 2016-17 is estimated to be only 2.4% for 2019-20.

which had a high GFD share of 6.1% of GSDP in 2016-17 is now projected at 3.2%
for 2019-20. It has managed to achieve a GFD of 3% in 2017-18.

  • J&K, Assam , Odisha & Chhattisgarh
    among the larger states with significant increase in GFD.

from Arunachal Pradesh, which reported a surplus in 2016-17 and then is
currently estimated to have a deficit, Sikkim and Mizoram are the other two
states with a similar situation. Both these states had a surplus which was 0.4%
and 1.5% of GSDP in 2016-17 are estimated to have GFD of 2.8% and 2.1%
respectively in 2019-20.

Among the
larger states, Chhattisgarh had an increase in GFD by 1.6% over the 4 years.
In  2016-17, the GFD was a low 1.6% of
GSDP which as per the estimate for 2019-20 has doubled to 3.2% of GSDP.

Jammu &
Kashmir which had a high GFD share of 4.9% has shown variance over the last
four years. While it managed to reduce the actual GFD in 2017-18 to 2%, the
revised estimates for 2018-19 peg the GFD at 11% and the budget estimate for
2019-20 put it at 6.5%. The current situation in the state may only add to this
increasing trend.

and Assam are the other two states whose GFD % is estimated to miss the target
of 3% with 3.5% and 3.1% respectively in 2019-20.

Fiscal Deficit of State Governments_Change in GFD of states as share of GSDP

As per
the Budget Estimates for 2019-20, 12 states are estimated to cross the FRBM
mandated GFD limit of 3% of GSDP.

Fiscal Deficit of State Governments_GFD of states as percent of GDP 2019-20

borrowings from a major part of financing Gross Fiscal Deficit of the States

As per
the actual
accounts for 2017-18
, 84% of the states’ GFD is financed through Market borrowings. As per one of the
from 14th Finance Commission Report, most of the state
governments have opted out of National Small Savings Fund (NSSF), and have opted
for Market borrowings as an option to raise funds for the fiscal deficit.

and Advances constituted 15.6% of sources in financing GFD for 2017-18, followed
by Provident Funds at 8.2%. These are average shares for all the states and the
sources through which each of the individual states finance their fiscal
deficit varied in 2017-18.

from LIC, NABARD, NCDC, SBI and other banks constituted 3.1% of deficit
financing. The loans from Centre constituted only 1.1% of the state deficit

As per
the revised estimates for 2018-19, the share of Market Borrowings is estimated
to be reduced to 73.7%, followed by provident funds which is estimated to
account for 6.3% of deficit financing. Loans from LIC, NABARD, NCDC, SBI and
other banks are estimated to account for 4.3%.  Deposits and Advances which was the second
highest source for 2017-18, is estimated to have only 3% share of deficit

However, as
per the Budget estimates for 2019-20, 87.9% of the deficit financing is
estimated to be from Market Borrowings. Meanwhile, the loans from Centre are
estimated to constitute 3.3% of the deficit financing.

Fiscal Deficit of State Governments_Deficit Financing of States

While GFD
is moving towards the set target, rise in market borrowings is a concern

of the states for 2019-20 is estimated to be within the 3% of GDP limit
recommended by Fiscal Responsibility and Financial Management Act, 2003. The RBI
report on Fiscal Position of State Government
that this deficit financing is done to a large extent through market
borrowings. As per the report, market borrowings financed 52.8% of the fiscal
deficit of the states in 2001 which has over the past few years has rapidly
increased to around 88% as per the budget estimates of 2019-20. States with GFD
equal to or less than 3% are almost entirely financing their fiscal deficit
through market borrowings.

A look at
the expenditure of states, would reveal that major portion is non-capital
expenditure. Such expenditure is not productive for the economy as it is not an
investment for the future. Borrowings from the market to fiancé such fiscal
deficit would not augur well for the economy in the longer run.

So, while
the efforts by the states to reduce the fiscal deficit are appreciable, finding
more reliable and less burdensome sources to finance the expenditure and
identifying ways to reduce the non-capital expenditure would be a prudent way
to reduce fiscal deficit of the states.

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