States’ Spending Could Increase 12-15% In FY22: Report

A look at detailed states' finances confirm that total transfers from the Center (devolution + grants) account for almost 40-45% of states' total receipts, Motilal Oswal Financial Services has said in its latest report.

Almost half of their receipts constitute states' own taxes, while others (such as states' own non-tax revenue receipts and non-debt capital receipts) account for less than 10% of states' total receipts, the firm has noted.

"If so, we can arrive at estimates for likely growth in states' total spending by making some assumptions on states' own receipts and fiscal deficit for FY22. Since the central government has allowed states to run fiscal deficits of up to 5% of GDP in FY21 and up to 4.5% of GDP in FY22, assuming 15-25% growth in states' own receipts, it suggests that their total spending could grow anywhere between 5% and 22% in FY22. With 20% growth in states' own receipts, their spending could grow 12-15% in FY22, following a 5% growth in FY21 (based on actual data for 18 states available up to Nov'20 and assuming fiscal deficit of 4.5% of GDP). If so, it means an average growth of 10% in states' total spending in FY21-22, lower than 13% growth in pre-COVID years, the Motilal Oswal Financial report states.

According to the report growth in public sector spending could weaken to 7% in FY22 from 15% in FY21 and stay there for the next few years.