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Maharashtra's decline from being fiscal surplus to a fiscal deficit state

A higher fiscal deficit, lower capex spending, and rising revenue spending have contributed to a decline in Maharashtra's fiscal situation. Economists say the state needs to return to capex spending

November 14, 2024 / 13:28 IST
New government will have challenges on revenue, growth and fiscal front

Maharashtra seems to be tightening the purse strings, when the expenditure pattern over the last few years is reviewed.

By the end of this fiscal, it will be one of the six major states to record a contraction in capital expenditure. It would also mark the first year for the state since Covid to spend less on capex than the previous year.

"Maharashtra has ample resources being the commercial capital of the country. The state’s economic strategy should prioritise growth-enabling expenditure to solidify its fiscal footing,” economist M Govinda Rao told Moneycontrol.

Faltering growth 

Despite being home to a population with one of the highest per-capita incomes in the country and clocking a lower inflation rate compared to most Indian states, Maharashtra seems to be battling with a faltering economic growth.

The state is expected to stumble to 5.5 percent growth rate in FY25 from 10.9 percent in the previous fiscal and 16 percent in FY23.

Shrinking revenue 

According to a Moneycontrol analysis, Maharashtra's revenue deficit widened five-fold in FY24 to nearly Rs 20,000 crore, compared to the previous year.

“Maharashtra has high growth, strong economic presence, and tax bases. Though the state has demonstrated effective revenue mobilisation, reflected in its revenue growth, higher expenditure growth has resulted in a consistent revenue deficit,” said Srihari Nayudu, economist at the National Institute of Public Finance and Policy (NIPFP).

A positive revenue deficit implies that some of the state's borrowings are directed towards revenue expenditure, rather than developmental or capital projects.

The state aims to eliminate its revenue deficit by FY27.

Eroding fiscal prudence

The other target for the state is to bring its fiscal deficit to the pre-pandemic levels. Although the state’s fiscal deficit is likely to be less than the 3 percent limit set by the Finance Commission in FY25, data shows that it has turned from a fiscal surplus state to a deficit one.

Maharashtra’s fiscal deficit exceeded 2 percent in FY20 and is expected to be 2.6 percent of GSDP in 2024-25.

As Maharashtra charts its fiscal future, economists suggest a balanced strategy that supports welfare needs and investments in capital growth.

With the rise of targeted cash transfer schemes, such as those for women and farmers, the state’s revenue deficit has grown from 0.1 percent of the GSDP in 2022-23 to 0.5 percent in 2024-25.

NIPFP professor Lekha S Chakraborty stressed on the importance of a balanced approach to welfare spending for sustainable fiscal health. “The Fiscal Legislations Act of Maharashtra requires phasing out of the revenue deficit completely. However, the revenue deficit has increased... Mainly due to targeted cash transfer schemes for women and farmers,” Chakraborty told Moneycontrol.

She suggested combining "basic income (cash transfers) with participation income (employment-related income)" to align social welfare goals with fiscal responsibility, noting that revenue spending growth has outpaced the revenue receipt growth.

The issue of freebies has also stirred a debate, with experts calling for stricter limits on such expenditures to avoid opportunity costs.

Economist Rao argued that Maharashtra should be cautious with redistributive policies. "Although redistribution is a legitimate government function, it entails opportunity cost. It is necessary to limit such freebies,” he said. He advocated for cash transfers over subsidisation of commodities to minimise market distortions, recommending targeted support for genuinely vulnerable sections instead.

“Estimating the net effect is difficult without analysing budget data since the governments often adjust existing schemes and reallocate funds,” Nayudu said.

Maharashtra will go to polls on November 20 with the counting of votes scheduled for November 23. It will be a challenge before the new government to bring back revenues and growth on track and guard the fiscal front.

Meghna Mittal
Meghna Mittal Deputy News Editor at Moneycontrol. Meghna has experience across television, print, online and wire media. She has been covering the Indian economy, monetary and fiscal policies, Finance and Trade ministries. She tweets at @Meghnamittal23 Contact: meghna.mittal@nw18.com
Ishaan Gera
first published: Nov 14, 2024 01:22 pm

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