State governments are likely to run wider fiscal deficit in financial year 2016-17 because of higher interest bill and wage hike pressures, an HSBC report said on Monday.
According to the global financial services firm, despite higher transfers from the centre, an analysis of 18 state budget documents suggests that the state governments on aggregate clocked slightly wider deficits than budgeted at the start of the year.
“State governments are grappling with two new spending pressures — the interest bill on UDAY bonds and pay commission wage hikes,” HSBC said in a research note and added that accounting sufficiently for both suggests that state deficit could rise to 2.9 per cent of GDP in FY17 from a revised 2.7 per cent in FY16 (aggregate for 17 States).”
The report however, noted that a “disciplined” central government fiscal stance is expected to offset this slippage.
“Consolidated government capex thrust is likely to remain unchanged and the overall impact on growth mildly positive,” it added.
Though, the states have made much more realistic revenue assumptions this time around. But unfortunately, they seem to have underestimated expenditure, the global brokerage said.
According to HSBC, a third of the states (6 of 18) have already made space for these wage hikes in their fiscal accounts (like Uttarakhand, Andhra Pradesh and Haryana). Of the remaining, “we assume that a majority will incur these as under-budgeted costs through the year while the remaining will defer to FY18,” it said.