States – including Maharashtra, home to the country’s financial capital, Mumbai, India’s most populous state, Uttar Pradesh, and Prime Minister Modi’s home state of Gujarat – believe that spending increased by 21.5% in 2022-23 and plans to increase it by another 11% in 2023-24.
However, actual spending data available for the period from April 2022 to January 2023 shows that spending has only increased by 11% compared to a year ago.
Economists say this trend was likely to be seen in all states.
Indian states publish their local budgets during the months of February and March, after the federal budget proposal.
“While recent budgets factor in aggressive spending growth over the coming year (2023-24), it should be kept in mind that states have generally not met their spending targets these last years, I-SEC PD economists Tadit Kundi, A Prasanna and Abhishek Upadhyay have written.
Indian states collectively tend to outspend the federal government and have a significant impact on growth and welfare. “Spending (as a percent of GDP) fell in FY23, despite sustained revenue,” wrote Pranjul Bhandari, chief Indian economist at HSBC Securities and Capital Markets.
Bhandari attributes the slowdown in state spending to the end of a tax on offsets, volatile oil prices and increased liabilities related to centrally-sponsored social schemes.
“In addition, steps have been taken to discourage
off-budget borrowing by states, Bhandari said.
“We believe that each of these lower government spending factors is likely to carry through to FY24.”
A lower government bond rate, however, could give the bond market some breathing space, which would be a silver lining, they said.
HSBC economists expect the state budget deficit to be 2.3% of the nation’s gross domestic product (GDP) in FY23 and 2.5% of GDP in FY23. FY24, both below the normal allowable limit of 3% of GDP.
I-SEC PD expects states to borrow approximately 8.1 trillion Indian rupees gross and 5.3 trillion net rupees in the coming year.
In FY23, states borrowed 7.6 trillion rupees, below the budgeted 9.1 trillion.