Editorial 1 : Decoding state budgets
Introduction: The ongoing election season has drawn sharp attention to India’s fiscal health. While the Government of India’s fiscal metrics are keenly dissected and well understood, the fiscal situation of state governments tends to be less scrutinised. However, recently states’ fiscal health has come under scrutiny.
Sources to analyse state’s fiscal health
- State budgets are a rich source of publicly available information on state government finances.
- A web of factors among states makes analysing their budgets both interesting and challenging.
- Additionally, the publication of monthly fiscal indicators by the CAG, albeit with modest lags, is useful in assessing emerging trends in state finances.
- Two additional sources of information are data on the states’ usage of ways and means advances and overdraft facilities extended by the Reserve Bank of India, and their market borrowings that are also facilitated by the latter.
Analysis of states’ budget
1. A healthy growth in revenue receipts
- The 2024-25 budgets or votes on account (VoA) are available in the public domain for 26 states (except Arunachal Pradesh and Sikkim).
- An analysis of the data they contain reveals that the states expect a 9.2 per cent growth in their combined revenue receipts this year.
- While this growth appears moderate, it hinges on the correctness of the base revenues indicated in the revised estimates for 2023-24, among other factors.
- Around half of the total revenues of states is from states’ own tax revenues (SOTR).
- Therefore, a material deviation between the actual and indicated growth of own taxes can impact the expansion in the total revenues of the states.
- In the FY2025 Budget estimates (BE), the combined SOTR of the 26 states is set to expand by 13.8 per cent on the back of an even higher 15.4 per cent growth estimated in the previous year’s revised estimates.
2. States’ own tax revenue is below estimated growth
- Disappointingly however, the provisional data of many of the sample states for April-February 2023-24 indicates that the growth of key components of own taxes such as sales tax, state GST and excise duty was far below the levels included in the revised estimates.
- This implies that a much higher growth would be needed to meet the absolute level of targets in the FY2025 budgets if the actual revenues last year turn out to be lower than those assumed.
3. A rise in the state’s share in the devolution of money from centre
- Another 40-45 per cent of the revenues of the states is accounted for by transfers from the Centre, taxes and grants.
- Taxes devolved by the Centre to the states are projected to increase by 10.4 per cent this year, in line with the growth indicated by the GoI in the interim Union budget presented in February 2024.
- States received an upside in their revenues on account of higher-than-budgeted tax devolution for three consecutive years during FY2022-24.
- Possible lack of prior knowledge about the timing of inflow of such additional devolution from the Centre may have been the reason for a deviation in the states’ planned and actual borrowings in many instances since that period.
- It would be interesting to see whether the GoI revises the amount of tax devolution for FY2025 in its final Union budget which is expected to be presented around July 2024.
- The 26 states have indicated a high 18 per cent expansion in grants in their revised estimates, followed by a 7 per cent contraction in their combined grants this year.
4. A consistent growth in revenue and capital expenditures
- On the expenditure side, the states have pencilled in a growth of 7 per cent and 11 per cent in their revenue and capital expenditures respectively.
- The states’ capital expenditure had shown an impressive 27 per cent expansion in April to February 2023-24 according to the CAG data.
- However, the revised estimates built in a sharper 34 per cent surge in capital spending, which is suspected will have been missed, pushing up the required growth in capex in FY2025 into double-digits.
- It is anticipated that capital spending to kick off on a slow note in the first few weeks of the year with parliamentary elections underway and the lull to sustain until the final Union Budget is presented.
- The tepidness may unfortunately extend further during the monsoon months.
- Overall, capital spending by states this year is likely to end up being heavily back-ended, which may influence the timing of the states’ market borrowings over the course of the year.
5. The state’s borrowings were higher than expected
- Last year had ended on a particularly curious note on the state borrowing front.
- For the fourth quarter, the states had initially indicated a massive borrowing of Rs 4.1 trillion.
- This looked set to be undershot until February 2024, especially with the additional devolution released by the Union government at the end of that month.
- However, the actual debt issuance during March 2024 amounted to a surprisingly large Rs 1.9 trillion, 51 per cent higher than the indicated amount of Rs 1.3 trillion.
- Several factors, such as a preference to hold larger cash going into the period of the model code of conduct, may have driven some states to expand their borrowings.
- It is also possible that some states have chosen to use up a larger part of their borrowing limit for 2023-24 before the year ended.
- Subsequently, in the first two auctions of this fiscal year, eight states have raised Rs 226 billion, nearly 40 per cent lower than the Rs. 373 billion indicated for this period.
- With the fiscal deficit budgeted to be steady, and a slight step up in redemptions of state government securities, it is projected that their gross borrowing to inch up to Rs 10.5-11 trillion in the current year.
- The anticipated FPI funds related to the bond index inclusion will ease the supply-demand dynamics in the government bond market as the year progresses.
- Further, with modest rate cuts foreseen from the Monetary Policy Committee in the second half of the year, the states’ borrowing costs are likely to trend lower during that period.
Conclusion: Capital expenditure by states will be slow in the first half of the year due to elections. Spending could pick up after the Union Budget and the monsoon season.
Editorial 2 : Turning seaward
Introduction: A report in The Indian Express revealed the government’s expansive plans to transform the Andaman and Nicobar Islands into a genuine security sentinel to the east of peninsular India and a crucial node for peace and security in the Indo-Pacific.
The closed territory will become the biggest strategic asset of India in the Indian Ocean
- The report points to the rapid expansion of military infrastructure in the island chain that will allow the basing of advanced military platforms, improve communication and surveillance infrastructure, and the permanent deployment of troops.
- These plans mark the end of Delhi’s prolonged strategic neglect of these islands.
- Tucked away under the control of the Union Home Ministry, the islands were treated as closed territory, with limited access to the Indian mainland and no connection to the neighbouring South East Asian nations.
- The NDA government deserves credit for recognising the strategic and economic significance of the Andaman and Nicobar Islands and Lakshadweep.
Islands saw India’s journey from the British imperial era to a more isolationist era
- Given its deep maritime orientation and a global primacy rooted in naval power, the British Raj was conscious of the value of island territories — as crucial places for trans-oceanic commerce and the projection of power in the emerging age of capitalism and great power competition for markets and geopolitical influence.
- The innocent internationalism of independent India, its inward economic orientation, preoccupation with the consequences of Partition, and the Chinese occupation of Tibet, saw India pay little attention to its vast possibilities at sea despite a long coastline and the vital location of its two island chains.
- As Delhi’s economic reforms began to change the picture in the 1990s, it was the Indian Navy that called for a fresh perspective on sea power.
- It was hard to change landlubbers that dominated India’s policy establishment in Delhi.
- Even when they moved, for example, with the setting up of the first and only joint tri-service command at Port Blair in 2001, it was never given the financial and military resources to realize the full potential of the Andaman and Nicobar Island chain.
China’s geopolitical ambitions have woken up India from its slumbers
- Successive coalition governments did not have the strategic bandwidth or the bureaucratic energy to do justice to the island territories.
- It needed a strong government in Delhi, with a full majority and the political will of Prime Minister Narendra Modi, to force policy changes in the maritime domain.
- Delhi’s maritime push to develop the islands was reinforced by China’s naval pull.
- Since the turn of the 21st century, a rising China began to send regular naval squadrons into the Indian Ocean and develop bases and dual-use facilities at key locations in the littoral.
- Like the British Raj, a rising China had the geopolitical sensibility of a great maritime power and understood the strategic value of islands.
- It made consistent political outreach to island states in the Indian Ocean — from Sri Lanka and Maldives to Seychelles and Mauritius.
- Even as it began to compete with China, Delhi has woken up to the possibility of developing its own ignored island territories.
- It is for a good reason that the Chinese strategic community calls the Andaman and Nicobar Islands a “metal chain” strung right down the Bay of Bengal to the mouth of the Malacca — with the potential to block China’s access to the Indian Ocean.
- A bestirred Delhi will hopefully waste no time in turning its impressive plans into concrete outcomes.
Conclusion: Delhi has woken up to the need for developing its ignored island territories. Focus on Andaman and Nicobar is welcome.