ECOWRAP

JULY 24, 2017

ISSUE NO: 20, FY18

A LONG ROAD TO UTTAM PRADESH

Recently, the newly elected Uttar Pradesh Government
presented its annual budget for 2017-18 with a desire to
transform Uttar Pradesh into Uttam Pradesh.
For 2017-18, the state Government has estimated its fiscal
deficit to be Rs 42,968 crore, which is 2.97% of the state GDP.
The state has already been in the lime light for breaching its
fiscal deficit target of 3% prescribed by 14 th finance commission
for last two years due to interest liability on UDAY scheme (in
FY16 @ 5.32% and in FY17 @4.40%), and declining revenue
surplus.
There are 2 ways of interpreting fiscal deficit numbers of Uttar
Pradesh. First, it is defined the gap between total expenditure
and total revenue receipts that is met primarily by market
borrowings. We believe while the revenue mobiisation figures
for current fiscal though realistic will still have a downward bias
given the implementation of GST. Additionally, the expenditure
numbers are most likely to be slashed. Against this background,
fiscal deficit for FY18 is likely to have an upward bias.
Second, fiscal deficit may also be defined as the capital
expenditure of various services (budgeted to decline by 26% in
current fiscal as against a 12% increase in last fiscal) that may
be met from revenue surplus. Thus, a higher fiscal deficit per se
is not bad, until and unless it finances productive capital
expenditure. However, the decline in capital expenditure on
various activities (general, social and economic), are across the
board and are as much as 59% in some cases in UP budget for
FY18.
It is now abundantly clear that States like (Uttar Pradesh, Tamil
Nadu, Rajasthan, Punjab, Kerala, Haryana) are not eligible for
additional market borrowing in FY18, as they are not compliant
to the fiscal prudence norms prescribed by 14th finance
commission. Thus, while the cut in capital expenditure in
productive areas is likely to act as a drag on growth for such
states, there is at least a positive fallout. Contrary to popular
perception, most of these states will not be able to borrow from
the market. This will mean that the fear of state government
borrowings jumping manifold may not materialize and the fear
of states borrowing more than centre as is being anticipated in
market may not fructify. However, the fear of such may keep
the pot boiling on yields on state government securities for
some time and keep them elevated. We expect such yields to
stabilse in a few months time.
SBI ECOWRAP
SBI ECOWRAP

IMPACT OF LOAN WAIVER ON UP ECONOMY

i Recently, the newly elected Uttar Pradesh Government presented its annual budget for 2017-18 with a desire to
transform Uttar Pradesh into Uttam Pradesh. The budget for 2017-18 is also crucial given the fact that Uttar
Pradesh has recently announced farm loan waiver scheme of Rs 36,000 crore (2.4% of GSDP) and it will be quite
interesting to see how the UP Government balances the fiscal arithmetic.

i As per Budgetary figure, the total revenue receipts for 2017-18 are estimated to be Rs 3,19,397 crore, an
increase of 19% over the revised estimates of 2016-17. States tax revenue is expected to increase by 21% in
2017-18 to Rs 2,32,908 crore (including estimated GST of Rs 28,603 crore) over the revised estimates of
2016-17.

i For 2017-18, the state Government has estimated its fiscal deficit to be Rs 42,968 crore, which is 2.97% of the
state GDP. The state has already been in the lime light for breaching its fiscal deficit target of 3%
prescribed by 14th finance commission for last two years due to interest liability on UDAY scheme (in FY16 @
5.32% and in FY17 @4.40%), and declining revenue surplus.

i There are 2 ways of interpreting fiscal deficit numbers of Uttar Pradesh:

i First, it is defined the gap between total expenditure and total revenue receipts met by Loan
Recoveries (which is a small item) and primarily by market borrowings. Total expenditure is budgeted to
increase by 13.1% in current fiscal (11.9% as per revised figure and scaled down from 14.1% budgeted figure
for last fiscal) and Revenue Receipts at 18.6% in current fiscal (18.6% as per revised figure and scaled down
from 24% budgeted figure for last fiscal). We believe while the revenue mobiisation figures for current fiscal
though realistic will still have a downward bias given the implementation of GST, the Expenditure numbers are
most likely to be slashed as we progressively move forward. Against this background, fiscal deficit for FY18 is
likely to have an upward bias.
Fiscal Status of Uar Pradesh over last ve years (Rs crore)

Growth (FY17 Growth (FY18

Parculars FY14 FY15 FY16 FY17(BE) FY17(RE) FY18 (BE)
RE/FY16) % BE/FY17 RE) %

1. Revenue Receipts 168214 193422 227076 281555 269407 319397 18.6 18.6
2. Tax Revenue 129359 140795 172080 206894 192869 232908 12.1 20.8
3. Non Tax Revenue 38855 52626 54996 74662 76538 86489 39.2 13.0
4. Capital Receipts 15490 35783 75239 58565 64340 57793 -14.5 -10.2
5. Loan Recoveries 590 262 726 304 315 284 -56.6 -9.8
6. Borrowing 14900 35520 74514 58261 64024 57509 -14.1 -10.2
7. Total receipts 183704 229204 302315 340121 333746 377191 10.4 13.0
8. Revenue Expenditure 158147 171027 212736 253355 244901 307119 15.1 25.4
Of which Interest payment 17412 18864 21448 27334 27379 33212 27.7 21.3
9. Capital Expenditure 42503 64581 91213 93580 95354 77541 4.5 -18.7
10. Total Expenditure 200650 235608 303949 346935 340255 384660 11.9 13.1
11. Revenue Surplus 10067 22394 14340 28201 24506 12279 70.9 -49.9
12. Fiscal Decit 23680 32513 58475 49961 55021 42968 -5.9 -21.9
13. Primary decit 6267 13649 37027 22627 27642 9756 -25.3 -64.7
14. Fiscal Decit as % GSDP 2.77 3.40 5.32 4.00 4.40 2.97
15. Primary Decit 0.73 1.43 3.37 1.81 2.21 0.67
16. Revenue Surplus 1.18 2.34 1.30 2.26 1.96 0.85
17. Debt to GDP Rao 28.3 27.9 29.5 35.50 30.0 28.6
Source: UP Budget Documents, SBI Research

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SBI ECOWRAP

CAPITAL EXPENDITURE IS DECLINING

i Second, fiscal deficit may also be defined as the capital expenditure of various services (Rs 53,258 crores and
budgeted to decline by 26% in current fiscal as against a 12% increase in last fiscal) that may be met from
revenue surplus. Thus, a higher fiscal deficit per se is not bad, until and unless it finances productive capital
expenditure. However, in case of Uttar Pradesh budget, given the huge fiscal pressures from loan waiver, the
postulated decline in capital expenditure was difficult to avoid.
i However, the decline in capital expenditure on various activities (general, social and economic), are across the
board and are as much as 59% in some cases. Instead of building long term productive assets through capital
expenditure, by reducing the amount will not be a positive sign for infrastructure deficient state like UP. At the
same time, we however appreciate that providing for farm loan waiver was perhaps only of the last indigenous
solutions to relieve rural distress, at least in the short term.
i Providing farm loan waiver in one hand and at the same time, reducing capital expenditure on agriculture and
irrigation, will not be a long term viable solution for an agrarian economy.
i Some of the declines in capital expenditure, like the capital expenditure on Police services (for modernizing law
and order situation by acquiring new machinery) declining by more than 58% in FY18, we hope are not part of
long term trends given that improving law and order situation of the UP is an efficient sine quo non for economic
development in Uttar Pradesh.

Uar Pradesh: Capital Expenditure (Rs Crore)

Growth (FY17 Growth (FY18
Parculars FY16 FY17 (BE) FY17 (RE) FY18 (BE)
RE/ FY16) % BE/FY17 RE) %
Total Capital Expenditure 91213 93580 95354 77541 4.5 -18.7
(i) Capital Expenditure on Various services 64423 71878 72197 53258 12.1 -26.2
(a) General Services 5259 6824 6767 3601 28.7 -46.8
Police 1015 1458 1546 639 52.3 -58.6
Public Construcon 1285 1663 1657 1455 28.9 -12.2
Others 2959 3704 3564 1507 20.4 -57.7
(b) Social Services 11707 19009 18462 15111 57.7 -18.2
Educaon, Sports, Art & Culture 1130 3702 3770 1722 233.5 -54.3
Health and Welfare 2256 3684 3609 2333 60.0 -35.3
Water availability, Housing and Urban Development 7286 9775 9330 9789 28.0 4.9
SC,ST and OBC welfare + Social welfare and nutrion Other
1034 1850 1753 1267 69.6 -27.8
Social services
(c) Economic Services 47457 46045 46969 34545 -1.0 -26.4
Agriculture and allied Acvies 2272 1286 1255 722 -44.7 -42.4
Rural Development 4757 6135 4604 3378 -3.2 -26.6
Irrigaon and ood Control 5052 6905 6614 4093 30.9 -38.1
Renewable and non-renewable energy 18809 11578 12422 7384 -34.0 -40.6
Transportaon 15715 19002 20928 15454 33.2 -26.2
Special area acvies + Industry and Mining + Others 852 1139 1145 3515 34.4 207.0
(ii) Public Borrowing 17673 15114 15512 22010 -12.2 41.9
(iii) Loans and advances 9118 6588 7644.69 2273 -16.2 -70.3
Source: UP Budget Documents, SBI Research

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SBI ECOWRAP

REVENUE EXPENDITURE
i Total revenue expenditure is estimated to be 3,07,119 crore, an increase of 25% (Rs 62,218 crore) over
revised estimate of FY17. Out of increased amount of Rs 62,218 crore, lions share Rs 37,201 crore has been
allotted to Agriculture and Allied activities and this could be the farm loan waived amount recently announced
by the state Government.
i To adjust this lump sum amount, the Government has reduced Expenditure (revenue and capital) on some of
the key activities like Energy (-51.5%), Transportation (-11.8%), Social Welfare and Nutrition (-25.1%), etc.

Uar Pradesh: Revenue Expenditure (Rs Crore)

Growth (FY17 Growth (FY18
Parculars FY16 FY17 (BE) FY17 (RE) FY18 (BE)
RE/FY16) % BE/FY17 RE) %
Revenue Expenditure 212736 253355 244901 307119 15.1 25.4
General Services 72228 92856 91029 111039 26.0 22.0
Interest Expenditure 28415 38106 38151 45444 34.3 19.1
Administrave Services 14658 19243 17861 21828 21.9 22.2
Pension and Other Services 24184 28540 28396 35936 17.4 26.6
Social Services 82486 101790 95443 101407 15.7 6.2
Educaon, Sports, Art & Culture 45077 52332 48465 50490 7.5 4.2
Health and Family Welfare 11195 15453 13284 16317 18.7 22.8
Social Welfare and Nutrion 16995 20637 20696 15508 21.8 -25.1
Economic services 47881 48021 47742 83095 -0.3 74.0
Agriculture and allied Acvies 5098 6850 6494 43695 27.4 572.8
Rural Development 7714 12418 12101 17280 56.9 42.8
Irrigaon and ood Control 5222 6920 6504 7899 24.5 21.4
Renewable and non-renewable energy 22225 13943 14548 7061 -34.5 -51.5
Industry & mining 3082 3106 2538 1776 -17.7 -30.0
Transportaon 3573 3545 4535 4003 27.0 -11.8
Subsidy 10140 10688 10688 11578 5.4 8.3
Source: UP Budget Documents, SBI Research

WAY FORWARD
i It is now abundantly clear that States like (Uttar Pradesh, Tamil Nadu, Rajasthan, Punjab, Kerala, Haryana) are
not eligible for additional market borrowing in FY18, as they are not compliant to the fiscal prudence norms
prescribed by 14th finance commission. So, the only option left with these states is to reduce their expenditure
to be in line with the fiscal deficit target of 3% in FY18.
i In case of Maharashtra and Karnataka, who have recently declared to waive their farm loan are eligible for
additional market borrowing of Rs 19,000 crore and Rs 8,000 crore and we expect that States who are eligible
for additional borrowing ((Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, and Telangana) in FY18,
some of them may go for loan waiver scheme.
i While the cut in capital expenditure in productive areas is likely to act as a drag on growth for such states,
there is at least a positive fallout. Contrary to popular perception, most of these states will not be able to
borrow from the market. This will mean that the fear of state government borrowings jumping manifold may
not materialize and the fear of states borrowing more than centre as is being anticipated in market may not
fructify. However, the fear of such may keep the pot boiling on yields on state government securities for some
time and keep them elevated. We expect yields on state government securities to stabilse in a few months
time.
i In essence, we hope Uttar Pradesh will transition to Uttam Pradesh but the path and time taken will be
arduous . Along-with keeping its fiscal deficit below 3% mark, UP Government also need to provide enough fund
foe the development of agriculture and industry sectors. Note that, UP has been ranked 20th out of 21 states on
the 2016 State Investment Potential Index (released by NCAER). To improve its situation UP also has to
strongly promote vocational education for job creation and try to reduce the shortage of electricity.
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SBI ECOWRAP

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immediately after the State Bank of India was reproduced with proper acknowledgement. The

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technical advice to the management on is based on information & data procured from

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analysis. The Bank or the Research Team assumes no

liability if any person or entity relies on views,
After the first reorganization of the Bank, when
opinion or facts & figures finding place in
specialized departments like Management
Ecowrap.
Science, Management Information Systems,
Planning and Market Segment Departments
took over the statistical work of E&SRD, the
Department was renamed as ERD.

However, with the ERD team now taking on

multidimensional functionalities in the area of
corporate analytics, risk management, strategy
and so on, who knows, the time may have
come to rename it again!

CONTACT DETAILS Email: soumya.ghosh@sbi.co.in

Dr. Soumya Kanti Ghosh gcea.erd@sbi.co.in
Group Chief Economic Adviser Phone: 022-22742440
State Bank of India
Corporate Centre
Madam Cama Road
Nariman Point