A Deep Dive into State Budgets in India India Policy Forum 2017 New - PowerPoint PPT Presentation

A Deep Dive into State Budgets in India India Policy Forum 2017 New Delhi, India Neelkanth Mishra /+91 22 6777 3716 / neelkanth.mishra@credit-suisse.com Prateek Singh /+91 22 6777 3894 / prateek.singh@credit-suisse.com DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Agenda  Rising Fiscal Importance of the States − States together now spend 87% more than (net) centre − Central transfers up, and so are states’ own taxes, but scope for improvement − Larger bond market footprint due to higher absolute deficits and borrowing  Analyzing expenditure trends and patterns − In under-sized governments revenue expenditure still appears important − Focus on social spending continues − Limited risk of a debt trap − Improvement in the budgeting process can reduce market distortions Assessing impact of GST, Loan Waivers and FRBM − GST: fiscal uncertainty greater for the center initially; can it trigger innovation at states? − Loan Waivers: not a one-off development, assessing near-term impact − FRBM Review committee: how easy for the states to comply? Conclusions 2

Rising Fiscal Importance of the States Expenditure: states now spend 87% more than the centre Receipts: states’ own taxes have grown, but significant scope for improvement Larger bond market footprint

States share of general government spending now 65% State expenditure growing faster than Centre's States now spend 1.87x the Centre's net spend Rs tn 25% 30 1.9x 1.8x 20% 25 1.7x 15% 1.6x 20 1.5x 10% 15 1.4x 1.3x 5% 10 1.2x 1.1x 0% 5 1.0x -5% 0 0.9x 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018b Central Exp. (Net) Y/Y (%) State Exp. Y/Y (%) State Centre (net) Ratio (RHS) Growth in aggregate expenditure of state governments has outpaced that of the central government for each of the last seven years From spending 6% more than the centre in FY2011, states are budgeted to spend 87% more than the Centre in FY2018b Source: RBI, Budget Documents, Credit Suisse Estimates 4

Surge in transfers now over, growth slowing Total state spend to grow 9% over FY17r Sources of increase in expenditure 30 30% 5 Rs tn Rs tn 4 25 25% 3 20 20% 2 15 15% 1 10 10% 0 5 5% -1 2009 2010 2011 2012 2013 2014 2015 2016 2017r 2018b 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Expenditure YoY (RHS) ex-UDAY (RHS) Own Revenues Central Transfer Fiscal Deficit Spending is budgeted to grow just 9.3% in FY2018 Smaller increase in central transfers (due to slower tax growth at the centre, slower growth in grants) and a drop in the fiscal deficit Slowdown worse for states more dependent on central transfers Source: RBI, Budget Documents, Credit Suisse Research 5

Own taxes continue to rise: 60% is VAT States' own taxes have risen as % of GDP VAT is 60% of States’ Own Tax Others 30% 6.5% Electricity 4% 3% CST 4% 25% Vehicles 6.1% 5% 20% State Excise 15% 5.7% 12% 10% 5.3% State Sales Tax 5% 60% Property Taxes 0% 4.9% 12% 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018b Split of Rs10tn Own Own Taxes YoY (%) As % of GDP (RHS) Taxes in FY17b A third of spending increase FY2011 to FY2018b came from own taxes − Own taxes as % of GDP up from 5.9% in FY2011 to 6.5% now; improvements in JH and TL VAT is 60% of own taxes; 40% of all VAT is from alcohol and petroleum products 40% of states’ own taxes subsumed by GST Source: RBI, Budget Documents, Credit Suisse Research 6

Share of Non-VAT taxes steadily declining Share of non-VAT taxes steadily declining Non-VAT taxes are more concentrated 45% 85% 81% 80% 80% 44% 80% 74% 43% 75% 72% 72% 42% 70% 65% 41% 65% 40% 59% 60% 56% 57% 39% 55% 38% 48% 50% 47% 47% 37% 45% 42% 36% 40% 35% Population GDP Total Tax VAT State Property CST 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Excise Share of non-Sales Taxes in States' Own Tax Top 5 States Top 10 States Some non-VAT taxes are more cyclical (e.g. property), but decline has been steady Non-VAT taxes are also more concentrated than population/GDP/VAT − The top 5 for each of the non-VAT taxes are also different The perceived loss of freedom with GST may drive more innovation and hard work Source: RBI, Budget Documents, Credit Suisse Research 7

Share of non-tax revenues also stagnating Non-tax receipts have declined in importance Share of non-tax receipts over time 40% 2.1% 100% 90% 35% 80% 30% 1.8% 70% 25% 60% 20% 1.5% 50% 15% 40% 10% 30% 1.2% 5% 20% 0% 10% -5% 0.9% 0% 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018b 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Non Tax Revenue Receipts YoY (%) As % of GDP (RHS) Interest General Social Industries Power Petroleum Others States' non-tax revenues fell from 18% of all revenue receipts in 1995 to 8% now. − From being 2.1% of GDP in 1995, they just add up to 1.2% of GDP in FY2018b Some of this trend is healthy: Interest income used to be a dominant source of non-tax income, but has come down significantly; industries, power and petroleum are up Source: RBI, Budget Documents, Credit Suisse Research 8

State deficits are up, but concerns over-stated General government deficits (Centre + States) State deficits up from lows, but under control 5.0% 12% 4.5% 10% 4.0% 8% 3.5% 6% 3.0% 4% 2.5% 2% 2.0% 1.5% 0% 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018b 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Union Fiscal Deficit (% of GDP) State Fiscal Deficit UDAY State Fiscal Deficit Without UDAY General government deficit trending down (ex-UDAY); FY2011 inappropriate comparison Adjusted for UDAY, aggregate state deficits have been in the 2.5%-2.7% of GDP range in the last five years, and well within the 3% range prescribed for them FRBM vision playing out: centre had been profligate, now shrunk to its promised size Source: RBI, Budget Documents, Credit Suisse Research 9

The bigger footprint of the states: a reset, not a trend State borrowing vs. Central borrowing YoY growth in bond issuance by states 7,000 80% 5.0 60% Rs tn Rs bn 4.5 70% 6,000 50% 4.0 60% 5,000 3.5 40% 50% 3.0 4,000 2.5 30% 40% 3,000 2.0 30% 20% 1.5 2,000 20% 1.0 10% 1,000 0.5 10% 0.0 0% 0 0% 2011 2012 2013 2014 2015 2016 2017 2018 2002 2004 2006 2008 2010 2012 2014 2016 2018 States' SDL Borrowings YoY (RHS) States' Borrowings Centre's Borrowings States/Centre (RHS) “Forward looking” warnings mostly come from the bond markets − The 3% + 3% FRBM rule is now showing up in the bond market, and they did not expect it − Extrapolation (backward looking and somewhat unwarranted) explains some of the panic Issuance growth to slow in FY2018b as deficit ratio stabilizes − Share of deficit funded through bonds already at 80% Source: RBI, Budget Documents, Credit Suisse Research 10

The eco-system has not adjusted to this change State borrowing is very 2H skewed 1H/2H skew in overall government borrowing 100% 1.4 4.5 SDLs Raised by States Total for FY (RHS) 90% Rs tn 4.0 1.2 80% 1H 2H 3.5 Share of Borrowings in 1H and 2H 70% 1.0 3.0 60% 0.8 50% 2.5 40% 2.0 0.6 30% 1.5 0.4 20% 1.0 10% 0.2 0.5 0% '13 '14 '15 '16 '17 '13 '14 '15 '16 '17 '13 '14 '15 '16 '17 0.0 0.0 Centre States Aggregate 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 The bulk of state government borrowing still happens in the fourth quarter This is skewing the overall government borrowing seasonality − Against the central government pattern of 60:40 1H:2H, states are 40:60 or worse − Centre sets its issuance calendar to avoid 2H crowding out when private credit picks up − States were much smaller earlier and did not matter as much but now they do Source: RBI, Credit Suisse Research 11

Analyzing expenditure trends and patterns Revenue expenditure is still dominant (and not all that bad) Social spending continues to get priority Some vicious cycles visible despite redistribution Far from debt trap (mostly)

Revenue expenditure still dominant (and not all that bad) 17% of state spending is on Capex Share of capex across states 35 20% 600 30% Rs tn 19% 30 500 25% 18% 25 17% 400 20% 16% 20 15% 300 15% 15 14% 200 10% 13% 10 12% 100 5% 5 11% 0 10% 0 0% 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018b KE HA CG JH WB OR AP GU TN BI KA MP MH TL RJ UP Revenue Ex. Capex Capex Share (RHS) Capex (Rs bn) Capex Share (RHS) Capex is only about 17% of FY2018b state spending: down in the last two years from an all-time high of nearly 20% in FY2016, but still among the highest recorded Significant variation among states: from < 10% in Kerala to ~25% in Telangana Source: RBI, Budget Documents, Credit Suisse Research 13