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UP Budget: Farm loan waiver weighs on capex plan

17-Jul-2017

Notwithstanding the burden of the recently announced farm loan waiver and the 7th Pay Commission (PC), Uttar Pradesh (UP) has budgeted for marginal fiscal consolidation in FY18 based on ambitious growth in tax receipts and a sharp decline in capital expenditure. Fiscal deficit is budgeted to narrow to 3.0 % of GSDP, from 3.2 % (4.4 % incl. UDAY) in FY17 and 4.1 % (5.3 %) in FY16.
Total receipts are expected to grow 19 % in FY18 on account of six-year-high growth of ~24 % in states own taxes and a40 % increase in grants from the Centre. Although UP is expected to benefit from GST implementation due to its orientation toward consumption, such high growth assumptions are debatable, in our view.
Further, while revenue spending is budgeted to grow at the 13-year-highest level of ~25 % owing to the farm loan waiver and the 7th PC, capital spending is budgeted to decline by ~30 % - the worst in 13 years.
Finally, the state expects to borrow INR392b from the market in FY18, up ~5 % from FY17. It also implies that market borrowings will finance 91 % of UP's fiscal deficit this year.
UP presented its budget for 2017-18 on 11 July 2017. Since it is the most populous state in the country with highest representation of members in both houses of the parliament, its budget holds special importance. Further, the state 's budget holds significance because it gives us an idea of how the farm loan waiver (amounting to INR360b in UP) affects state finances.

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