State governments are unlikely to meet their fiscal deficit targets in FY18. Against a budgeted deficit of 2.6 per cent of gross domestic product (GSDP), states may see slippages of 0.2 per cent, suggests a study by HSBC Global Research. The slippages are largely due to the implementation of the pay commission's suggestions and the interest payments due to Ujwal Discom Assurance Yojana (UDAY). In FY17, states overshot their fiscal deficit targets. Against an original target of 2.6 per cent, the fiscal deficit rose to 2.8 per cent.
This suggests that states are likely borrow more from markets in FY18 to fund their expenditure. HSBC estimates market borrowings by states to swell up to 2.6 per cent of GDP in FY18, up from 2.2 per cent in FY16. But this increase is likely to be offset by lower borrowings by the Centre.
But those expecting the public sector to lead the investment revival are likely to be disappointed. Combined investments by the Centre, states, and public sector enterprises are expected to decline to 7.1 per cent of GDP in FY18, down from 7.4 per cent in FY17. This is largely due to lower investments by public sector enterprises.