Fiscal support to economic growth to weaken in 2020s decade, says report

New Delhi, The fiscal support to economic growth is likely to weaken substantially in the 2020s-decade vis-a-vis the 2010s', a study on Indian economy has noted .

According to Ecoscope report by Motilal Oswal Financial Services, after declining 5.5 per cent YoY in FY21, transfer (devolution + grants) to states is budgeted to grow 15 per cent YoY next year, implying an average growth of 4.5 per cent in FY21-22 vis-a-vis an average growth of 14.4 per cent in the pre-COVID (FY16-19) period.

Since these transfers account for almost 45 per cent of states' total receipts, an assumed fiscal deficit of 4.5%/4% of GDP suggests states' spending could grow by 5%/12-15% in FY21/FY22. This implies an average growth of 10 per cent in total spending by states as against 13 per cent in the pre-COVID years.

According to brokerage, even after combining states with the central government and CPSEs, total spending of the public sector is estimated to grow 15 per cent YoY in FY21 and by 5.5-7.5 per cent YoY in FY22. If this analysis is extended and assumption made that states pare down their deficit to 3 per cent of GDP by FY24, combined spending growth is likely to remain 7 per cent in FY23-24 vis-a-vis 11 per cent in the pre-COVID years.

The report had earlier said that the budget proposal to put extend the glide path of fiscal deficit and reach 4.5 per cent deficit by FY26 is not actually expansionary. This level of deficit actually suggest average growth of 6 per cent in total spending between FY23 and FY26, lower than the 8.6 per cent in pre-COVID years.


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