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The state of Madhya Pradesh may have exaggerated its projected spending while being pessimistic in its forecast of nominal growth for the coming fiscal year. According to a research note from India Ratings & Research, this could mean overstating the state’s projected budget deficit.

In its FY23 budget, Madhya Pradesh has set the FY23 budget deficit at 4.6% of the state’s gross domestic product. This is above the limits prescribed by the Fifteenth Funding Committee and agreed upon by the union government, which is 4% of the GSDP with an additional 0.5% allowed under certain conditions.

In FY22, the state had a budget deficit of 4.1% of GDP, according to revised estimates.

India Ratings expects the state budget deficit to fall to 4.2% of GDP. The budget deficit projections for FY23 are based on a high capital expenditure assumption and a pessimistic assumption for GSDP nominal growth, the rating agency said in a March 22 note.

The state’s revenue shortfall is estimated to be 0.3% of GDP in FY23, comparable to pre-pandemic levels.

Nominal GDP growth undervalued

India Ratings believes Madhya Pradesh is underestimating nominal GSDP growth by 11.1% in FY23, compared to an estimated 12.9% in FY22.

Average GSDP growth for the state was 14.3% during FY16-FY20, the rating agency said, adding that it expects the state’s economy to grow nominally by 13.6% in the next fiscal year.

Income estimates reasonable; Capex growth a lot

For FY23, the state expects revenue to grow 12.13% from revised FY22 estimates. Madhya Pradesh’s average revenue growth growth during FY16-FY20 was 13%, according to India Ratings.

Expenditure excluding interest income, which drives demand in the economy, is expected to grow 12.32% in FY23. While estimates of overall spending growth are reasonable, the mix suggests a shift in spending.

According to India Ratings, earnings, excluding interest, salary and pension, will only grow by 8.43%. However, capital expenditures are estimated to grow 22.3% from revised FY22 estimates.

“Historically, capex growth in the state averaged 7.4% during FY16-FY20. Annual capex growth for FY23 appears to be steep on an already high basis. India Ratings, therefore, believes the capex budget estimate is too high and unattainable in FY23,” the note said.

This post Optimistic spending estimates overestimate budget deficit, says India Ratings

was original published at “https://www.bloombergquint.com/business/madhya-pradesh-budget-optimistic-spending-estimates-overstate-fiscal-deficit-says-india-ratings”