States to see quality of deficit at its 6-year best in FY25: India Ratings

Measuring the quality of deficit as the revenue deficit as a percentage of the fiscal deficit – where a lower percentage means better quality of deficit – India Ratings found that the figure halving to 7.3 percent in 2024-25 from 14.7 percent in 2023-24, with the consolidated fiscal deficit pegged at 3.0 percent of GDP and revenue deficit at 0.2 percent of GDP.

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“This also means borrowings are primarily used for capex and the focus on capex has remained intact,” said Sunil Kumar Sinha, principal economist at India Ratings, in a note on March 7.

The 26 budgets presented so far represent states that accounted for 96.1 percent of India’s GDP in 2021-22.

Using another approach to measure the quality of government expenditure, India Ratings found that it may remain unchanged in 2024-25 from the current year, but would still be higher than the pre-Covid level. This approach measures the quality of expenditure as capital outlay as a percentage of total expenditure.

Using this method, it was found that the biggest improvement in the capital outlay-to-total expenditure is seen for Odisha, Tripura, and Uttarakhand, while the ratio declines the most in case of Bihar, Nagaland, and Madhya Pradesh.

Some of the other noteworthy aspects of the 26 state budgets for 2024-25 are:

>> States’ own tax and non-tax revenues are seen rising 13.9 percent and 11.9 percent, respectively, with own revenues as a whole pegged at 7.9 percent of GDP in 2024-25, up from 7.8 percent in 2023-24.

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>> Committed expenditure – items such as interest payments and pensions – account for 31.6 percent of the revenue expenditure in 2024-25, up from 30.2 percent in 2023-24.

>> Gross and net market borrowings of states are seen at a record high of Rs 10.2 lakh crore and Rs 7.2 lakh crore, respectively, in 2024-25.

>> States’ capital outlay is seen growing 7.1 percent to Rs 8.7 lakh crore in 2024-25. As a percentage of GDP, this would mean a 20-basis-point decline from 2023-24 to 2.6 percent. However, the composition of capex has seemingly turned for the better when it comes to social services such as health and education.

“The share of social services in capital outlay was stagnant at 22.1 percent during FY18-FY20. This jumped to 31.8 percent in FY24 (Revised Estimate) and has been budgeted at 32.3 percent for FY25,” Paras Jasrai, senior analyst-public finance at India Ratings, said.

“It is encouraging to note that states such as Uttar Pradesh, Gujarat, etc. are at the forefront on social services spending as they have lagged in human development indicators for quite some time. It appears that the COVID-19 pandemic has nudged the states to focus on health and education for the development of human capital,” Jasrai added.