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2. 30 July 2017 India | Strategy India | Strategy FY18 State Budgets FY18 State Budgets Fiscal discipline sensitive, h Fiscal discipline sensitive, hinges on profligacy of vulnerable states inges on profligacy of vulnerable states In this note, we In this note, we wind up our study on FY18 state budgets. Having analysed 17 states, which wind up our study on FY18 state budgets. Having analysed 17 states, which comprise of 93% of the Indian GDP, comprise of 93% of the Indian GDP, we find the we find the aggregate GFD within F subject to subject to a) revenue realization risks of a) revenue realization risks of property property, , excise & from unaccounted costs of 7 from unaccounted costs of 7 Pay C Commission ommission & & farm loan waivers interest payment burden post UDAY interest payment burden post UDAY. . Overall capex growth stands at 5% Overall capex growth stands at 5%YoY revenue expenditure) revenue expenditure), with rural capex gro , with rural capex growing at 20%YoY. wing at 20%YoY. Telangana emerges as the key driver of capex for FY18 while Punjab is the most vulnerable state driver of capex for FY18 while Punjab is the most vulnerable state in terms of financial stability stability. . Major Major capex sectors capex sectors are transport and are transport and irrigation the past to meet budgets the past to meet budgets, , the these se are are also the most also the most likely Punjab and Kerala have openly budgeted GFD that breaches FRBM norms in FY18BE, Punjab and Kerala have openly budgeted GFD that breaches FRBM norms in FY18BE, lack of penal action for doing so may inspire other states to evade penal action for doing so may inspire other states to evade fiscal 3% cap of FRBM. 3% cap of FRBM. Suhas Harinarayanan Suhas Harinarayanan suhas.hari@jmfl.com Tel: (+91 22) 66303037 Arshad Perwez Arshad Perwez arshadperwez@jmfl.com Tel: (+91 22) 66303080 Vaikam Kumar S Vaikam Kumar S vaikam.kumar@jmfl.com Tel: (+91 22) 66303018 Aishwarya Pratik Sonker Aishwarya Pratik Sonker aishwarya.sonker@jmfl.com Tel: (+91 22) 66303351 aggregate GFD within FRBM limit of 3% but excise & State State t taxes axes and b) expenditure risks and b) expenditure risks farm loan waivers, , especially after especially after higher RBM limit of 3% but th th Pay higher YoY (vs 12 (vs 12%YoY %YoY for for Telangana emerges as the key in terms of financial but g given the history of capex cuts iven the history of capex cuts in in likely areas areas to witness to witness capex cuts irrigation but capex cuts. While . While lack of fiscal disciplin discipline, jeopardizing the e, jeopardizing the R Revenue receipts grow evenue receipts grow robustly expected to grow by 13.4%YoY in FY18 (Refer to Exhibit A). Within revenue receipts, States’ Own Tax Revenue (SOTR: 47% share) are expected to grow the fastest (16%YoY), driven by four States- UP, Maharashtra, Tamil Nadu & Karnataka. Hence, subject to the materialization of a) Stamps & registration duties post the demonetisation slowdown in the property market, b) State Excise after Supreme Court’s order to close liquor shops on highways & c) our estimated 55% of SOTR subject to uncertainty of GST; for these major states, the overall SOTR will be determined. We find that Bihar and UP are the largest beneficiaries of Centre’s support, based on the criteria for a) devolution of taxes and b) grants in aid. While revenue realisation has improved over the years (98% in FY17RE), unrealistic assumptions by UP and Tamil Nadu pose threat to distort overall revenue receipts. robustly subject to threats subject to threats: : At an aggregate level, revenue receipts are Receipts growth for 17 states growth for 17 states Exhibit A. Exhibit A. Revenue Revenue Receipts Source: State Budgets, JM Financial Exhibit B. Exhibit B. Growth Growth in total expenditure for in total expenditure for aggregate 17 states aggregate 17 states Capex growth slows in FY18: Capex growth slows in FY18: States have witnessed rising share in total government spending since FY16. While overall expenditure is expected to grow by 11%YoY in FY18BE, capex is projected to grow by 5% (half of revenue expenditure (revex) growth of 12%YoY), which increases to 12% on adjusting for Punjab’s one-off*. Share of capex in overall spending stands at 16% with Telangana emerging as the key driver of capex for FY18, with a) the highest budgeted capex growth, b) holding 2 c) highest capex share in total expenditure. We estimate rural capex to grow by 20%YoY in FY18 vs 21% in FY17RE. Assuming 25% of Maharashtra’s loan waiver cost of INR 340bn is written off in FY18, through reclassification of rural capex into rural revex, this growth could fall to 13%YoY. Revenue expenditure (12%YoY) on other hand shows that committed expenditure (31% of revex) is expected to grow faster than developmental revex in FY18 (16%YoY vs 11%) nd position in aggregate capex after UP & Source: State Budgets, JM Financial Exhibit C. GFD for aggregate of 17 states Exhibit C. GFD for aggregate of 17 states th th P Pay Impact of UDAY, 7 Impact of UDAY, 7 Bengal, all states are under UDAY & will bear the cost of a) higher interest payments & b) loss funding of DISCOMS in the coming years. 12 out of 17 states have announced the implementation of the 7PC, of which we fear unaccounted costs by UP, Maharashtra and Bihar. Lastly, UP is the only state among the four states to have announced farm loan waiver which has fully accounted for the cost in its budget. For the remaining three states, capex cuts in areas like transport, irrigation, rural development, water supply, sanitation, housing & urban development is likely, given the history of capex cuts to meet budget. ay C Commission ommission (7PC) (7PC) & Farm Loan waivers: & Farm Loan waivers: Barring Odisha & West Source: State Budgets, JM Financial *Punjab’s One-off refers to one-off allocation of INR 306bn in FY17RE as loans to food procuring agencies against the legacy amount in the food procurement * *Colour Scale Colour Scale for note: for note: In order of falling intensity Aggregate G Aggregate GFD within FRBM limits FD within FRBM limits: : Aggregate GFD for 17 states stands at 2.6% of GSDP, below the FRBM limit 3% but subject to a) risks in inadequate revenues & b) unaccounted expenditures highlighted above. While Punjab and Kerala have breached the FRBM norms openly in FY18BE, Punjab clearly emerges as the most vulnerable state in FY18BE with the highest a) GFD, b) Debt/GSDP ratio & c) Revenue deficit % of GSDP. FYTD, gross market borrowings of states have reached INR 821bn; 22%YoY. The ratio of net market borrowings of the State to Centre stands at 57% vs 42% in FY17.The spread of State Development Loans (SDLs) over 10yr Gsec bonds has moderated to 81bps in Jul’17 vs 96bps in Mar’17. Positive Positive Best Best Negative Negative Worst Worst JM Financial Institutional Securities Limited

3. FY18 State Budgets FY18 State Budgets 31 July 2017 State State- -wise  Top Contributors to Indian GDP: Top Contributors to Indian GDP: The 17 states analysed comprise of 93% of the Indian GDP. Of these, Maharashtra leads with 15.1% share, followed by Tamil Nadu (8.9%) and Uttar Pradesh (8.6%). Of all states, AP has accounted for the highest growth in GSDP, followed by Bihar and Uttar Pradesh as shown below. wise Analysis of Analysis of Budget Budget A Aggregates ggregates E Exhibit xhibit 1. 1. State State- -wise Contribution to Indian GDP wise Contribution to Indian GDP E Exhibit xhibit 2. 2. State State- -wise budgeted growth in nominal GSDP wise budgeted growth in nominal GSDP Chattisgarh, Chattisgarh, 2% 2% Jharkhand, Jharkhand, 2% 2% %YoY Punjab, 3% Punjab, 3% 25% 23% Odisha, 2% Odisha, 2% Maharashtra, Maharashtra, 15% 15% Haryana, 4% Haryana, 4% 20% 17% Bihar, 4% Bihar, 4% 16% 13%15%15% 15% 13%14% 15% 13% 12% 11%12%12% MP, 4% MP, 4% Tamil Nadu, Tamil Nadu, 9% 9% 11% 10% 9% 9% 10% Kerala, 4% Kerala, 4% 5% Telangana, Telangana, 5% 5% 5% Uttar Uttar Pradesh, 9% Pradesh, 9% AP, 5% AP, 5% 0% Odisha Karnataka Punjab Aggregate WB* Kerala Chattisgarh Gujarat Jharkhand MP Haryana Rajasthan AP Bihar Maharashtra Tamil Nadu Uttar Pradesh Telangana Rajasthan, Rajasthan, 5% 5% Gujarat, 8% Gujarat, 8% Karnataka, Karnataka, 8% 8% WB*, 7% WB*, 7% Source: State Budgets 2017-18, JM Financial; *We have assumed West Bengal growth at 15%YoY Source: State Budgets 2017-18, JM Financial  Increased role of States through higher Increased role of States through higher transfer past three years, with a) change in funding pattern of Centrally Sponsored Schemes for Centre: States from 75:25 to 60:40 and b) higher tax devolution post the 14th Finance Commission (FFC); the transfers by the Centre to the States has risen as shown in Exhibit 3. Post tax devolution, tax to GDP ratio for States stands at 10.5% vs 7.3% for the Centre. The combined tax to GDP ratio for States and Centre for FY18BE is expected to improve to 17% of GDP vs 16.6% in FY17RE. transfer of resources from the Centre: of resources from the Centre: Over the E Exhibit xhibit 3. 3. Transfers to States by the Centre Transfers to States by the Centre E Exhibit xhibit 4 4. . Post devolution, Tax Post devolution, Tax- -to to- -GDP ratio for Centre & 17 states sta stands at 17% of In nds at 17% of Ind di ian GDP an GDP GDP ratio for Centre & 17 states Devolution to States & Uts Finance Commission Grants Scheme Related & Other transfers INR Bn FY17RE FY18BE 12000 17.0% 18.0% 16.6% 1031 1031 16.0% 10000 991 991 14.0% 3074 3074 8000 846 846 12.0% 2832 2832 10.5% 10.4% 10.0% 2437 2437 6000 7.3% 7.2% 8.0% 4000 6.0% 6746 6746 6080 6080 4.0% 5062 5062 2000 2.0% 0.0% 0 States Centre States & Centre FY16 FY17RE FY18BE Source: State Budgets 2017-18, JM Financial Source: State Budgets 2017-18, JM Financial; For 17 states only JM Financial Institutional Securities Limited Page 2

4. FY18 State Budgets FY18 State Budgets 31 July 2017 States’ States’ Sources of Sources of Revenue Of the total revenue receipts for States, State’s own tax revenues (SOTR) hold the majority share of 47%, followed by States’ share in Centre’s taxes (27%), as shown in Exhibit 5. Overall revenue receipts are expected to grow by 13%YoY vs 19%YoY in FY17RE (Refer to Exhibit 6). UP (14%) and Maharashtra (11%) maintain the greatest share in total revenue receipts as shown in Exhibit 9. UP has also projected one of the most aggressive growth in total revenue receipts in FY18BE (Refer to Exhibit 10).  Own Tax revenues: Own Tax revenues: Within SOTR, Taxes from Sales and trade (66% share-Exhibit 7) are budgeted to grow by 19%YoY, followed by taxes on vehicles (17%), as shown in Exhibit 8. Despite the slowdown post demonetisation, States have budgeted an 11%YoY growth in Stamps and registration duties (10% share) vs the 0.3%YoY in FY17RE. State excise, which comprises of 12% of SOTR, has been projected to grow by 9%YoY vs 12%YoY in FY17RE. Supreme Court ban of liquor shops on state and national highways may threaten this growth. Of all states, Maharashtra, UP, Tamil Nadu and Karnataka constitute c.50% of the each of the major SOTR sub-heads; i.e. Sales tax, State Excise and Stamps & Registration fee; as shown in Exhibit 11. Thus, for stability of overall revenue receipts, it is important that revenue assumption for these states materializes. Punjab (31%YoY) and Telangana (25%YoY) expect the highest growth for FY18 (Exhibit 13).  State’s Own State’s Own Non Non- -Tax revenues Tax revenues: Non-tax revenues form a less significant source of revenue for States and are expected to grow by merely 4%YoY in FY18 vs FY17RE. Maharashtra (12%) and UP (11%) hold the highest share in aggregate non-tax revenues (Refer to Exhibit 13), however the latter has budgeted the second highest de- growth in the same (-33%YoY) in FY18 - due to a 96%YoY fall in revenues from Education, sports, art & culture; contributing to the slowing of overall non-tax revenues.  Role of Centre: Role of Centre: Share in Centre’s Taxes & grants in aid from the Centre are decided on a criteria based on a) Need Need- -based factors based factors (like population, its composition & change in demographics after 1971, infrastructure distance), b) Revenue Disability measures capacity distance, per-capita distance from highest per-capita income), c) Cost Indicators Indicators (area) and d) Fiscal efficiency indicators Fiscal efficiency indicators (tax effort, fiscal discipline, e) forest cover cover. Further, in case of Grants from Centre, 11 states have been identified for Post- Devolution Grants. These are disbursed to States where the assessed gap cannot be covered by devolution alone. Being based on a) expenditure requirements of the States, b) Tax devolution to them and c) revenue mobilization capacity of States, three states under our analysis; a) Andhra Pradesh, b) Kerala and c) West Bengal are eligible for these grants. Overall, Exhibit 13 shows that UP and Bihar are the largest beneficiaries of Centre’s support.  Impact of GST Impact of GST: We estimate c.55% of SOTR to fall under the purview of GST and hence be eligible for compensation in case of any shortfall from the benchmark 14%YoY (with base year FY16) post GST (Link). Thus, revenue uncertainty from GST lurks around those states which have budgeted growth of their 55% of SOTR aggressively beyond 14%. On the other hand, the impact of GST on overall Centre’s tax collections will determine the divisible pool of taxes for the states. Any shock in Centre’s collections may adversely affect revenues of the States.  Are revenue assumptions Are revenue assumptions realistic? realistic? Over a period of three years since FY15, revenue assumptions have translated into better realisations at an aggregate level (Refer to Exhibit 14, 15). However, state-wise variations reveal that Telangana, Kerala and Bihar have made optimistic revenue assumptions in the past which resulted in poor realizations. It should be noted that budgeted numbers hint that Bihar will do reasonably well in FY17RE. States like AP and Karnataka have witnessed the best realization rates for revenue receipts. Revenue – – Role of the Centre & GST Role of the Centre & GST Revenue Disability measures (fiscal Cost- -disability disability forest JM Financial Institutional Securities Limited Page 3

5. FY18 State Budgets FY18 State Budgets 31 July 2017 E Exhibit xhibit 5 5. . Split of Split of aggregate aggregate R Revenue receipts for 17 States evenue receipts for 17 States E Exhibit xhibit 6 6. . T Total r 13%YoY in FY 13%YoY in FY18; otal re evenue receipts have been projected to grow at venue receipts have been projected to grow at 18; own tax revenues own tax revenues are expected to are expected to lead lead the growth the growth State's own State's own non tax rev, non tax rev, 8% 8% %YoY FY17RE FY18BE 42% 45% 40% 35% Grants in aid, Grants in aid, 19% 19% 30% 25% State's own State's own rev, 47% rev, 47% 20% 19% 19% 20% 16% 13% 13% 13% 12% 15% 10% 4% 5% States's share States's share in Centre's in Centre's taxes, 27% taxes, 27% 0% State's own revenues States's share in Centre's taxes Grants in aid State's own non tax revenue Total Revenue receipts Source: State Budgets 2017-18, JM Financial Source: State Budgets 2017-18, JM Financial Exhibit 8. Exhibit 8. Sales Tax is expected to drive SOTR Sales Tax is expected to drive SOTR in FY18 19%YoY 19%YoY growth, growth, Stamps & Registration Stamps & Registration by 25% FY17RE %YoY in FY18 with a 11%YoY with a E Exhibit xhibit 7 7. . Split of Split of States States’ ’ own tax own tax revenue (SOTR) revenue (SOTR) by 11%YoY FY18BE Others, 8% Others, 8% Taxes on Taxes on Vehicles, 6% Vehicles, 6% 19% 20% 17% Stamps & Stamps & registration, registration, 10% 10% 15% 15% 15% 15% 11% 9% 10% State Excise, State Excise, 12% 12% Sales Tax, Sales Tax, 66% 66% 5% 3% 3% 0% 0% Sales Tax State Excise Stamps & registration Taxes on Vehicles Others Source: State Budgets 2017-18, JM Financial Source: State Budgets 2017-18, JM Financial Exhibit 10. Exhibit 10. Budgeted growth in Budgeted growth in Revenue receipts by c contributor States ontributor States Revenue receipts by the the larg largest est Exhibit 9. Exhibit 9. State State- -wise share in Total Revenue receipts in FY18BE wise share in Total Revenue receipts in FY18BE Punjab, 3% Punjab, 3% Jharkhand, Jharkhand, 3% 3% FY17RE FY18BE Haryana, Haryana, 3% 3% Chattisgarh, Chattisgarh, 19% UP, 14% UP, 14% 19% 19% 20% 3% 3% 18% Odisha, 4% Odisha, 4% 16% Kerala, 4% Kerala, 4% Maharashtra Maharashtra , 11% , 11% 14% 12% 11% Telangana, Telangana, 5% 5% 11% 12% 9% 10% 8% AP, 6% AP, 6% Tamil Nadu, Tamil Nadu, 7% 7% 8% 6% Rajasthan, Rajasthan, 6% 6% Karnataka, Karnataka, 6% 6% West West Bengal, 6% Bengal, 6% MP, 6% MP, 6% 4% Gujarat, 6% Gujarat, 6% 2% Bihar, 6% Bihar, 6% 0% UP Maharashtra Tamil Nadu Karnataka Source: State Budgets 2017-18, JM Financial Source: State Budgets 2017-18, JM Financial JM Financial Institutional Securities Limited Page 4

6. FY18 State Budgets FY18 State Budgets 31 July 2017 Exhibit 11. Exhibit 11. Share of largest contributor states in major Share of largest contributor states in major heads of SOTR for FY18BE SOTR for FY18BE Others Maharashtra UP heads of Exhibit 12. Exhibit 12. Budgeted growth Budgeted growth in in major SOTR heads by largest contrib contributor utor States States in FY1 in FY18B 8BE E major SOTR heads by largest Tamil Nadu Karnataka %YoY Maharashtra UP Tamil Nadu Karnataka 100% 30% 8% 8% 9% 9% 26% 15% 15% 90% 25% 8% 8% 11% 11% 25% 6% 6% 80% 9% 9% 17% 17% 20% 17% 17% 70% 20% 14% 14% 16% 16% 60% 15% 12% 12% 21% 21% 14% 15% 50% 40% 9% 8% 10% 30% 59% 59% 5% 5% 50% 50% 45% 45% 20% 5% 3% 10% 0% 0% Sales Tax State Excise Stamps & Registration Sales Tax State Excise Stamps & Registration Source: State Budgets 2017-18, JM Financial Source: State Budgets 2017-18, JM Financial Exhibit 13. Exhibit 13. Snapshot of State Snapshot of State- -wise Revenue Receipts for FY18BE wise Revenue Receipts for FY18BE Share Share %YoY %YoY Share in Share in Centre’s Taxes Centre’s Taxes Grants from Grants from the Centre the Centre State’s own State’s own Non Non- -tax revenues tax revenues Share in Share in Centre’s Taxes Centre’s Taxes Grants from Grants from t the Centre he Centre State’s own State’s own Non Non- -tax revenues tax revenues SOTR SOTR SOTR SOTR States States West Bengal 5% 8% 9% 14% 11% 4% 1% 9% Jharkhand 2% 4% 3% 19% 15% 15% 4% 7% 15% Gujarat 7% 3% 4% 18% 11% 8% 11% 11% 28% 28% Bihar 3% 11% 11% 9% 9% 15% 11% ( (4% 4%) ) 2% 21% Rajasthan 5% 6% 6% 16% 11% 2% 8% 16% Odisha 3% 5% 5% 16% 11% 8% 5% 8% Haryana 4% 1% 2% 15% 16% 16% ( (11% 11%) ) 6% 37% 37% Punjab 4% 2% 2% 31% 31% 11% 27% 2% ( (48% 48%) ) UP 11% 11% 20% 20% 16% 16% 24% 24% 18% 18% 39% 39% 11% 11% ( (33% 33%) ) Maharashtra 15% 15% 6% 8% 12% 11% 1% 12% 12% 21% Tamil Nadu 10% 10% 5% 5% 14% 11% -2% 7% 9% Chattisgarh 2% 3% 3% 3% 11% 3% 4% 2% Kerala 5% 3% 3% 20% 11% 4% 7% 20% Karnataka 9% 5% 4% 9% 11% 9% 4% (2%) (2%) AP 5% 5% 9% 9% 9% 11% 36% 36% 3% 13% MP 5% 9% 9% 6% 14% 11% 2% 7% 12% Telangana 6% 3% 7% 25% 25% 14% 98% 98% 4% 100% 100% (22%) (22%) 4% 4% Aggregate Aggregate 100% 100% 100% 100% 100% 100% 16% 16% 13% 13% 13% 13% Exhibit 14. Exhibit 14. Actual r with with TS TS & R & RAJ Actual realiz AJ imposing a drag in FY17RE imposing a drag in FY17RE ealization ation of revenue receipts of revenue receipts has been improving has been improving, , Exhibit 15. Exhibit 15. Tax revenue as % of BE Tax revenue as % of BE too has been improving with GUJ imposing a drag in FY17RE GUJ imposing a drag in FY17RE too has been improving with UP UP & & FY17RE FY16A FY15A FY17RE FY16A FY15A 115% 110% 103% 103% 105% 102% 102% 102% 102% 102% 102% 102% 102% 102% 102% 110% 100% 100% 100% 100% 100% 99% 99% 96% 96% 98% 98% 100% 100% 97% 97% 104% 104% 105% 96% 96% 97% 97% 95% 86% 86% 95% 95% 102% 102% 101% 101% 94% 94% 100% 100% 92% 92% 100% 100% 99% 99% 90% 98% 98% 100% 101% 101% 97% 97% 95% 95% 98% 98% 97% 97% 85% 86% 86% 98% 98% 97% 97% 95% 95% 95% 97% 97% 80% 93% 93% 94% 94% 93% 93% 90% 75% 91% 91% 70% 85% 65% 80% 60% Bihar Odisha Chattisgarh Karnataka Punjab Aggregate Jharkhand Gujarat West Bengal Rajasthan Haryana Maharashtra MP AP Tamil Nadu UP Kerala Telangana Chattisgarh Maharashtra Karnataka Punjab Odisha West Bengal Jharkhand Gujarat Haryana MP Aggregate Bihar Rajasthan Tamil Nadu Kerala AP UP Telangana Source: State Budgets 2017-18, JM Financial Source: State Budgets 2017-18, JM Financial; TS refers to Telangana JM Financial Institutional Securities Limited Page 5

7. FY18 State Budgets FY18 State Budgets 31 July 2017 Where are the States spending Where are the States spending? ? – – Impact of Loan Waivers Loan Waivers Impact of UDAY, 7PC & Farm UDAY, 7PC & Farm While States at an aggregate level spend a higher proportion of their GDP vs. the Centre, they have also witnessed an increasing share in total government spending over the years i.e. from 58% in FY16 to 61% in FY18BE (Refer to Exhibit 16,17). Our expenditure analysis adjusts for the costs of UDAY for all states (except Telangana Telangana and Chattisgarh and Chattisgarh due to lack of clarity on due to lack of clarity on accounting DISCOMS DISCOMS under UDAY under UDAY), unless mentioned. Total expenditure growth for FY18BE stands at 11%YoY (vs 22% in FY17RE-Exhibit 21); lower than the revenue receipts growth (13%YoY). UP (14%) and Maharashtra (11%) are largest spending states, followed by Tamil Nadu and Karnataka (Refer to Exhibit 22). Cap Capex growth expected to slow to 5% in FY18: ex growth expected to slow to 5% in FY18: Capex by Centre & States together, stands at 4.3% of Indian GDP. While share of capex in total expenditure for the Centre is marginally higher than states (16.8% vs 16.2% in FY18 as shown in Exhibit 20), capex to GDP ratio for States is 1.5 times that of Centre (2.8% vs 1.7% for Centre). Chattisgarh (5.3%) and Bihar (5.2%) have the highest capex to GDP ratio amongst the 17 states, while Kerala (1.3%) and Maharashtra (1.4%) fall towards the end of the array. (Refer to Exhibit 30). As a percentage of total expenditure, Telangana (25%) and Bihar (21%) have the highest capex share in FY18BE. Telangana has budgeted the highest capex growth in FY18, 65%YoY and stands second in terms of share in aggregate capital spending by 17 states (after UP, as shown in Exhibit 30). This makes Telangana the key driver of capex the key driver of capex amongst amongst all states in FY18 all states in FY18. Any capex cuts in Telangana will disturb the overall capex growth of 5%YoY (vs 33% in FY17RE). Punjab has made a one-off allocation of INR 306bn in FY17RE as loans to food procuring agencies against the legacy amount in the food procurement. If we remove this component, capex growth for FY18BE rises to 13%YoY (vs 23% in FY17RE), marginally higher than revenue expenditure (12%YoY). Major capex areas for states have been irrigation, transport, rural development, energy and water supply, sanitation, housing & urban development, as shown in Exhibit 31. How is Rural Capex doing? How is Rural Capex doing? Rural India has been the focus area for the States and Centre. To assess the size of public investments, we aggregate capex on Agriculture and allied activities, irrigation, rural development (roads & housing) and special area programs. Exhibit 24 shows that 31% of total rural spending takes the form of capital expenditure. Rural capex is expected to grow by 20%YoY in FY18BE vs 21% in FY17RE. While Telangana, Maharashtra and UP have been the largest contributors to overall rural capex in the FY17RE, the sizable capex cuts in irrigation & rural development by UP in FY18BE to accommodate the farm loan waiver scheme, reduced its share in overall capex to 6% (from 11% in FY17RE) as shown in Exhibit 26. Rural Capex is further threatened by a) reclassification of rural capex to rural revenue expenditure in light of the farm loan waiver scheme (eg: Maharashtra) and b) Announcement of another loan waiver scheme by Telangana, one of the key drivers of rural capex . If we assume that 25% of If we assume that 25% of Maharashtra’s farm waiver cost waiver cost (INR 340bn) (INR 340bn) in borne in FY18BE by cutting rural capex and using released in borne in FY18BE by cutting rural capex and using released funds as rural revex, rural capex for FY18 may fall to 13%YoY funds as rural revex, rural capex for FY18 may fall to 13%YoY. except Bihar, AP, Bihar, AP, of debt takeover of accounting of debt takeover of  Telangana Maharashtra’s farm loan loan  Revenue Expenditure: Revenue Expenditure: Revenue expenditure comprises of 84% of total expenditure. Committed expenditure is defined as revenue expenditure on a) interest payments, b) pensions & other retirement benefits and c) Administrative services. Exhibit 27 shows that this expenditure comprises of 30% of total revenue expenditure, with Punjab (44%) and West Bengal (35%) holding the largest shares. The residual expenditure is termed as developmental expenditure and is expected to grow by 11%YoY, lower than committed expenditure growth of 16%YoY (Refer to Exhibit 28, 29). Major schemes impacting revenue & capital expenditure Major schemes impacting revenue & capital expenditure a) a) 7 7 Pay Commission (7PC) (7PC) & revenue expenditure & revenue expenditure: : 12 out of 17 states analysed have announced the implementation of the 7PC for their State govt. employees and pensioners. Exhibit 32 shows the budgeted wages and salaries growth post the announcement of the scheme. The table hints that states like Bihar, UP and Maharashtra have not fully accounted for costs of the 7PC. Punjab intends to implement the 6  th th Pay Commission th Pay Commission in FY18BE, but given that the hikes in 6PC were JM Financial Institutional Securities Limited Page 6

8. FY18 State Budgets FY18 State Budgets 31 July 2017 larger than those of 7PC, growth in FY18BE salaries by merely 5% indicates some unaccounted costs for Punjab. b) b)Will Will Farm Loan waiver Farm Loan waiver lead to capex cuts? Karnataka have announced the implementation of farm loan waivers. With UP leading the league with INR 360bn, Maharashtra intends bear a cost of around INR 340bn. Punjab’s cost of loan waivers is estimated around INR 250bn, but the state has made a provision of merely INR 15bn in the budget; awaiting an Expert Committee’s report. The cost of Karnataka’s loan waiver is relatively lower; around INR 82bn. Barring UP, the remaining three states have either made none or inadequate budget provisions to bear the costs of the scheme. Given the a) stress to meet budgeted GFD owing to the FRBM limit of 3% and b) history of capex cuts to meet budgets in the past; we fear capital spending in major sectors like transport, irrigation, rural development and water supply, sanitation, housing & urban development to witness the brunt of the scheme. Exhibit 31 shows the largest capex sectors of various states, which could be the possible victims of such capex cuts. lead to capex cuts? Four States- UP, Maharashtra, Punjab and c) c) UDAY UDAY & & future interest payment burden future interest payment burden: : Out of the 17 states analysed, all states barring Odisha and West Bengal have signed a MoU under UDAY scheme. As per the guidelines of the UDAY, the cost incurred to takeover the agreed debt of DISCOMS will not be included in fiscal deficit calculation if the debt takeover is done in FY16 and FY17. Most states issued power bonds to finance the cost of the scheme. States have takeover debt of DISCOMS in the form of grants, loans and advances and capital outlay towards DISCOMS. Of all states, Haryana and Madhya Pradesh are two states, to have budgeted some component of UDAY costs for FY18 as well. Exhibit 33 shows the impact of UDAY on States’ GFD. GFD for Bihar, AP, Telangana and Chattisgarh is same for with & without UDAY due to lack of clarity on accounting of debt takeover of DISCOMS. Going forward, not only will UDAY impose additional burden through higher interest payments, but also through funding of DISCOM losses as per UDAY guidelines. (Refer to Exhibit 34, 35) Are ex Are expenditure assumptions penditure assumptions realistic? expenditure has had better realization rates than capital expenditure with the accomplishment rate improving over the years (Refer to Exhibit 36 and 37). Focusing on revenue expenditure, while Telangana has the poorest success rates, AP has almost meet budget targets for all three years. States like Jharkhand, Bihar, Odisha, Chattisgarh, Karnataka and Punjab have exceeded their budgeted revex in FY17RE. Capex on the other hand, shows that Punjab, Haryana and Rajasthan have the weakest realization rates. realistic? Data for the past three years reveals that revenue  Exhibit 16. Exhibit 16. States spend a higher percentage of their GDP States spend a higher percentage of their GDP relative to the Centre Centre relative to the Exhibit 17. Exhibit 17. Share of States in Share of States in Total Expenditure government (Centre + States) government (Centre + States) h ha as been incr Total Expenditure by the s been incre ea asing sing Centre State by the Centre State 100% 20% 17% 18% 17% 16% 80% 16% 58% 58% 14% 60% 60% 61% 61% 12% 60% 11% 11% 10% 10% 8% 40% 6% 4% 42% 42% 20% 40% 40% 39% 39% 2% 0% 0% FY16 FY17RE FY18BE FY16 FY17RE FY18BE Source: Union Budget, State Budgets 2017-18, JM Financial; Adjusting for Centre’s transfer of resources towards states Source: Union Budget, State Budgets 2017-18, JM Financial; Adjusting for Centre’s transfer of resources towards states ; On adjusting for the one-off of Punjab, the share for FY17RE changes to 59%, still higher than FY16 JM Financial Institutional Securities Limited Page 7

9. FY18 State Budgets FY18 State Budgets 31 July 2017 Exhibit 18. Exhibit 18. Share of capex in total expenditure Share of capex in total expenditure- - States vs Centre Centre States vs Centre Exhibit 19. Exhibit 19. C Capex to GDP ratio apex to GDP ratio- - States vs Centre States vs Centre States 18% Centre States 17.2% 3.5% 3.0% 17% 16.8% 3.0% 2.8% 16.6% 2.6% 2.5% 17% 16.2% 16.2% 2.0% 1.8% 1.7% 1.7% 15.9% 16% 1.5% 1.0% 16% 0.5% 15% 0.0% FY16 FY17RE FY18BE FY16 FY17RE FY18BE Source: Union Budget, State Budgets 2017-18, JM Financial; Adjusting for Centre’s transfer of resources towards states Source: Union Budget, State Budgets 2017-18, JM Financial; Adjusting for Centre’s transfer of resources towards states ; On adjusting for the one-off of Punjab, the share for FY17RE changes to 59%, still higher than FY16 Exhibit 20. Exhibit 20. Share of ma marginally higher than FY16 rginally higher than FY16 Share of Ca Capex pex in total expenditure in total expenditure for for States in States in FY1 FY18BE 8BE is is Exhibit 21. Exhibit 21. Total 11%YoY 11%YoY; Capex by 5%YoY ; Capex by 5%YoY Total Expenditure Expenditure is expected to grow at modest is expected to grow at modest Revenue Expenditure Capital Expenditure FY17RE FY178BE 100.0 33% 35% 15.9 15.9 16.2 16.2 17.2 17.2 90.0 30% 80.0 70.0 25% 22% 20% 60.0 20% 50.0 84.1 84.1 83.8 83.8 82.8 82.8 15% 12% 40.0 11% 30.0 10% 5% 20.0 5% 10.0 0% 0.0 FY16 FY17RE FY18BE Revenue Expenditure Capital Expenditure Total expenditure Source: State Budgets 2017-18, JM Financial; Adjusting for Punjab’s one-off, the share for FY17RE capex reduces to 16% Source: State Budgets 2017-18, JM Financial; On adjusting for the one-off of Punjab, the expenditure growths change to 20%,23%,21% for FY17RE; & 12%,13%,12% in FY18BE respectively Exhibit 22. Exhibit 22. S State tate- -wise share wise share in in aggregate t aggregate total expenditure otal expenditure Exhibit 23. Exhibit 23. State State- -wise share in aggregate c wise share in aggregate capex apex Kerala, 2%Punjab, 2% Punjab, 2% Jharkhand, Jharkhand, 3% 3% Kerala, 2% Chattisgarh, Chattisgarh, 3% 3% Chattisgarh, Chattisgarh, 3% 3% Haryana, Haryana, 3% 3% UP, 13% UP, 13% Haryana, 3% Haryana, 3% UP, 14% UP, 14% Jharkhand, Jharkhand, 3% 3% Punjab, 3% Punjab, 3% Odisha, 4% Odisha, 4% West West Telangana, Telangana, 8% 8% Bengal, 5% Bengal, 5% Maharashtra, Maharashtra, 11% 11% Kerala, 4% Kerala, 4% Odisha, 5% Odisha, 5% Telangana, Telangana, 5% 5% Maharashtra Maharashtra , 8% , 8% AP, 5% AP, 5% Tamil Nadu, Tamil Nadu, 8% 8% AP, 6% AP, 6% Rajasthan, Rajasthan, 5% 5% Karnataka, Karnataka, 8% 8% Karnataka, Karnataka, 7% 7% MP, 6% MP, 6% Gujarat, 6% Gujarat, 6% Gujarat, 7% Gujarat, 7% Rajasthan, Rajasthan, 6% 6% Bihar, 8% Bihar, 8% Tamil Nadu, Tamil Nadu, 7% 7% West Bengal, West Bengal, 6% 6% MP, 7% MP, 7% Bihar, 6% Bihar, 6% Source: State Budgets 2017-18, JM Financial Source: State Budgets 2017-18, JM Financial JM Financial Institutional Securities Limited Page 8

10. FY18 State Budgets FY18 State Budgets 31 July 2017 Exhibit 24. Exhibit 24. Split of Rural Spending: Farm loan waiver is likely to eat into Split of Rural Spending: Farm loan waiver is likely to eat into rural capex in FY18 rural capex in FY18 Revex Exhibit 25. Exhibit 25. Rural Capex is expected to grow by 20%YoY in FY18 Rural Capex is expected to grow by 20%YoY in FY18 FY17RE FY18BE %YoY Capex 30% 100 26% 24% 90 25% 31 31 31 31 32 32 22% 21% 80 21% 20% 70 20% 60 15% 50 40 10% 69 69 69 69 68 68 30 5% 20 10 0% 0 Rural Capex Rural revex Total rural spending FY16 FY17RE FY18BE Source: State Budgets 2017-18, JM Financial; * Adjusting for the one-off in Punjab’s loans and advances for Food Storage & warehousing “legacy issue” Source: State Budgets 2017-18, JM Financial; * Adjusting for the one-off in Punjab’s loans and advances for Food Storage & warehousing “legacy issue”; If we assume Maharashtra cuts rural capex to fund 25% of its loan waiver cost in FY18, rural capex will fall to 13%YoY Exhibit 26. Exhibit 26. Rural Capex Rural Capex may witness cuts if States reclassify this capex may witness cuts if States reclassify this capex as as revex for funding farm loan waiver scheme %YoY %YoY revex for funding farm loan waiver scheme Share in overall Share in overall Rural Capex Rural Capex Contribution to increase in rural capex Contribution to increase in rural capex States States FY17RE FY17RE FY18BE FY18BE FY17RE FY17RE FY18BE FY18BE FY17RE FY17RE FY18BE FY18BE 38% 35% 3% 4% 6 6 West Bengal 44% 11% 3% 3% 6 2 Jharkhand (2%) (2%) 17% 8% 8% (1) 7 Gujarat (15%) (15%) 40% 7% 8% ( (7 7) ) 14 Bihar 40% 48% 3% 3% 5 7 Rajasthan 29% 22% 5% 5% 6 5 Odisha (28%) (28%) 103% 103% 1% 1% (2) 4 Haryana 237% 237% ( (18% 18%) ) 3% 2% 14 ( (3 3) ) Punjab* 4% (33%) (33%) 11% 11% 6% 3 ( (19 19) ) UP 25% 12% 13% 13% 12% 12% 15 8 Maharashtra 21% 42% 3% 4% 3 7 Tamil Nadu 25% 4% 3% 2% 3 1 Chattisgarh 24% 15% 2% 1% 2 1 Kerala 28% 42% 8% 10% 10% 10 17 Karnataka (16%) (16%) 80% 80% 6% 9% ( (7 7) ) 24 24 AP 37% (1%) (1%) 10% 8% 16 16 0 MP 76% 76% 36% 11% 11% 13% 13% 29 29 20 20 Telangana Aggregate Aggregate 100 100 100 100 100 100 100 100 21% 21% 20% 20% Source: State Budgets 2017-18, JM Financial; * Adjusted for one-off in loans & advances for Punjab Exhibit 27. Exhibit 27. State r revenue expenditure evenue expenditure 48 State- -wise share of Committed expenditure in wise share of Committed expenditure in aggregate aggregate Exhibit 28. Exhibit 28. S State FY18BE FY18BE 39% tate- -wise growth in Committed expenditure for wise growth in Committed expenditure for 44 36% 43 34% 38 29% 35 34 24% 32 24% 32 31 22% 33 31 20% 31 30 30 20% 30 29 29 28 19% 16%17% 27 16% 15%16% 28 16% 16% 26 15% 14% 24 24 14% 12% 12% 10% 23 10% 21 9% 4% 18 4% Karnataka Haryana Telangana Punjab WB Maharashtra Odisha Chattisgarh Gujarat Jharkhand Aggregate TN MP Bihar Rajasthan UP AP Kerala Jharkhand Punjab WB Rajasthan Odisha Chattisgarh Karnataka Aggregate Gujarat Haryana MP TN Maharashtra Bihar UP AP Kerala Telangana Source: State Budgets 2017-18, JM Financial Source: State Budgets 2017-18, JM Financial; JM Financial Institutional Securities Limited Page 9

11. FY18 State Budgets FY18 State Budgets 31 July 2017 Exhibit 29. Exhibit 29. State growth growth in FY18 vs FY17RE in FY18 vs FY17RE State- -wise growth in development expenditure wise growth in development expenditure shows that barring UP, Gujarat and Telangana, all states have budgeted a lower shows that barring UP, Gujarat and Telangana, all states have budgeted a lower FY17RE FY18BE 60% 50% 40% 32% 30% 21% 21% 21% 19% 17% 17% 20% 12% 11% 11% 11% 10% 9% 9% 8% 8% 10% 4% 3% 3% -2% 2% 0% Jharkhand Aggregate Odisha Chattisgarh Punjab Karnataka West Bengal Gujarat Haryana Rajasthan MP Maharashtra Tamil Nadu Bihar AP UP Kerala Telangana -10% Source: State Budgets 2017-18, JM Financial Exhibit 30. xhibit 30.State State- -wise wise Expenditure Expenditure Aggregates Aggregates %YoY %YoY Capex to Capex to Total expenditure Total expenditure Capex as Capex as % of GDP % of GDP Revenue Revenue Capital Capital Total Total States States FY18BE FY18BE FY18BE FY18BE % % % % FY17RE FY17RE FY18BE FY18BE FY17RE FY17RE FY17RE FY17RE 17 3 25 21 18 5 12 West Bengal 1.8 42 42 12 34 16 40 40 13 20 Jharkhand 4.9 14 15 - -2 2 22 10 16 19 Gujarat 2.3 43 43 3 25 6 39 3 21 21 Bihar 5.2 5.2 18 5 - -2 2 28 15 8 15 Rajasthan 2.8 24 13 12 9 21 12 21 Odisha 5.2 22 10 1 63 63 20 15 12 Haryana 1.8 25 19 1035 1035 - -78 78 90 90 - -18 18 10 Punjab 1.8 18 29 29 29 - -23 23 21 17 15 UP 3.8 23 6 34 11 24 6 13 Maharashtra Tamil Nadu 1.4 2.1 13 10 29 14 15 11 15 33 6 56 56 16 36 8 19 Chattisgarh 5.3 5.3 20 16 17 2 20 15 8 Kerala 1.3 13 10 19 32 14 13 19 Karnataka 2.6 17 12 0 55 15 17 17 15 AP 3.0 21 11 43 10 24 11 19 MP 4.3 14 25 25 16 65 65 15 33 33 25 25 Telangana 4.9 5 5 22 22 11 11 16 16 2.8 2.8 20 20 12 12 33 33 Aggregate Aggregate Source Source: State Budgets, JM Financial; on adjusting for Punjab’s one-off, its capex growth fall to 144%YoY and 0.2%YoY for FY17RE and FY18BE JM Financial Institutional Securities Limited Page 10

12. FY18 State Budgets FY18 State Budgets 31 July 2017 Exhibit 31. Exhibit 31. State State- -wise Top Capex Sectors** wise Top Capex Sectors** nd nd Largest Capex Sector Largest Capex Sector Largest Capex Sector Largest Capex Sector 2 2 States States Sector Sector Share Share %YoY %YoY Sector Sector Share Share %YoY %YoY % FY17RE FY17RE FY18BE FY18BE % FY17RE FY17RE FY18BE FY18BE W/s, sanitation, housing, urban dev. Transport West Bengal 18 36 55 Irrigation 16 39 42 Jharkhand 35 19 24 Rural dev. 14 20 ( (1 1) ) Gujarat Irrigation 32 (1) 17 Transport 14 8 37 Bihar Rural dev. 27 (16) 32 Transport 17 28 ( (2 2) ) W/s, sanitation, housing, urban dev. Irrigation W/s, sanitation, housing, urban dev. W/s, sanitation, housing, urban dev. Rajasthan 30 18 21 Transport 21 (14) 88 Odisha 33 37 24 Transport 31 (14) 2 Haryana 21 5 116 Transport 18 (11) 23 Punjab 29 149 79 Irrigation 10 110 ( (45 45) ) W/s, sanitation, housing, urban dev. Transport W/s, sanitation, housing, urban dev. Irrigation UP Transport 28 33 ( (26 26) ) 18 28 5 Maharashtra Irrigation 26 7 8 25 16 63 Tamil Nadu Transport 29 21 31 21 33 31 Chattisgarh Transport 43 50 36 17 27 17 Kerala Transport 26 (12) ( (11 11) ) Agri. 8 5 42 Karnataka Irrigation 39 30 47 Transport 19 10 8 AP Irrigation 52 (17) 62 Transport 9 (15) ( (3 3) ) MP** Irrigation 27 30 13 Energy 16 687 31 Telangana Irrigation 41 84 4 Rural dev.* 12 - - Source: State Budgets 2017-18, JM Financial; W/s: Water Supply; ** The above shares are calculated by dividing allocation for capital outlay by total capital expenditure (which also includes loan & advances disbursed for various sectors * Allocation for FY17RE was zero, though historically transport holds the second highest share in total capex; **Shares have been calculated using capex including UDAY costs for FY18 th th Pay Commission & Pay Commission & budgeted growth in wages & salaries budgeted growth in wages & salaries FY17RE FY17RE FY18BE FY18BE Exhibit 32. Exhibit 32. State States States State- -wise Implementation of the 7 wise Implementation of the 7 Whether implemented Whether implemented Comments Comments States States that that announced announced the the implementation implementation Maharashtra Yes 11% 15% 7PC implementation from Jan’16 onwards. Arrears will be paid in 3-4 installments from FY19 Haryana Yes 22% 17% Haryana Govt announced the implementation of 7PC in Mar’17 with benefits from Jan’16 Was approved in Dec’16 itself by the Samajwadi Party govt. Salaries as yet reflecting older pay scale Decided to implement 7PC on 4 every year, staring from FY19 UP Yes 12% 15% thJul’17. Arrears from Jan’16 to be paid in 3 installments in May MP Yes 14% 18% Bihar Yes 25% 1% 1% Still to take final decision on timelines Rajasthan Yes 14% 39% 39% Committee constituted for implementation of 7th PC, no timelines provided Gujarat Yes 9% 9% Has already implemented the 7CPC in FY17 as per the budget The state cabinet had approved salary recommendations in Jan'17. Pensioners got the revised salaries from April 2017. Expects to provide hikes in salaries from 7CPC in FY19 & FY20 by estimating a hike by 31.58% for Salaries & 34.37% for Pensions in FY19 State pay commission has been formed to look at the implementation of 7PC; no timelines provided Announced the implementation of 7PC in Mar’17 from Jan’16; salary could be increased from July/August 2017 Announced the implementation of 7PC in Oct’16 from Jan’16. Constituted a fitment committee for implementation Jharkhand Yes 23% 12% Tamil Nadu Yes 10% 2% Karnataka Yes 9% 14% Chattisgarh Yes 25% 13% Odisha Yes 17% 27% 27% States that have not announced 7CPC implementation States that have not announced 7CPC implementation West Bengal No 14% - State has constituted its 6th Pay commission in Nov 2015, no timelines 11% Andhra Pradesh No 28% Pay revised every five years through State pay commission. - Telangana No - Revises the salaries of its State employees every five years Kerala No 17% 16% Follows its own State pay commission th Pay Commission in FY18 Punjab No 13% 5% 5% Seeks to implement the 6 Source: State Budgets 2017-18, Media, JM Financial; “-“: not available JM Financial Institutional Securities Limited Page 11

13. FY18 State Budgets FY18 State Budgets 31 July 2017 Exhibit 33. Exhibit 33. Impact of UDAY on State Finances Impact of UDAY on State Finances FY16 FY16 FY17BE FY17BE FY17RE FY17RE FY18BE FY18BE States States With UDAY With UDAY W/O UDAY W/O UDAY With UDAY With UDAY W/O UDAY W/O UDAY With UDAY With UDAY W/O UDAY W/O UDAY With UDAY With UDAY W/O UDAY W/O UDAY West Bengal 2.22 2.22 1.79 1.79 2.56 2.56 1.70^ 1.70^ Jharkhand 5.09 5.09 2.64 2.16 2.16 2.53 2.53 2.29 2.29 Gujarat 2.34 2.34 2.25 2.25 1.80 1.80 1.82 1.82 Bihar* 2.47 2.47 2.87 2.87 4.16 4.16 4.16 2.87 2.87 Rajasthan 9.38 9.38 3.42 3.42 5.62 5.62 3.00 6.36 6.36 3.37 2.99 2.99 Odisha 2.07 2.07 3.79 3.79 3.79 3.79 3.20 3.20 3.5 3.50 0 3.5 3.50 0 Haryana 6.49 6.49 2.92 4.27 4.27 2.47 4.27 2.49 2.84 2.61 Punjab 4.44 3.01 2.88 2.88 13. 13.89 89 11.55 11.55 4.96 4.96 4.96 4.96 UP 5.32 5.32 2.63 4.04 4.04 2.97 4.40 3.22 2.97 2.97 Maharashtra 1.42 1.42 1.59 1.59 2.20 2.00 1.53 1.53 Tamil Nadu 2.69 2.69 2.96 2.96 4. 4.58 58 2.88 2.79 2.79 Chattisgarh* 2.09 2.09 2.88 2.88 2.90 2.92 3.49 3.49 3.49 3.49 Kerala 3.03 3.03 3.03 3.51 3.51 3.51 3.54 3.54 3.54 3.44 3.44 Karnataka 2.60 2.60 2.30 2.30 2.16 2.16 2.61 2.61 AP* 3.58 3.58 3.58 2.99 2.99 3.06 3.06 3.00 3.00 MP 2.49 2.49 3.49 3.49 3.49 4.63 4.63 3.46 3.46 3.49 3.49 2.87 Telangana* 3.28 3.28 3.28 3.50 3.5 3.50 0 3.35 3.35 3.48 3.48 3.48 Aggregate Aggregate 3.31 3.31 2.50 2.50 2.92 2.92 2.58 2.58 3.68 3.68 3.02 3.02 2.64 2.64 2.60 2.60 Source: State Budgets 2017-18, JM Financial; ^ Assuming a growth of 15%YoY in nominal GSDP; * GFD for Bihar, AP, Telangana and Chattisgarh is same for With & Without UDAY due to lack of clarity on accounting of debt takeover of DISCOMS Exhibit 34. Exhibit 34. State State- -wise i wise interest nterest p payments ayments Exhibit 35. Exhibit 35. Yearwise DISCOM loss Yearwise DISCOM losses es to be taken over States as per UDAY guidelines States as per UDAY guidelines Year to takeover Year to takeover losses losses to be taken over by the by the Interest payments Interest payments % of loss of DISCOMS % of loss of DISCOMS to be taken over to be taken over Share in total Share in total FY17RE FY17RE FY18BE FY18BE States States (t) % %YoY %YoY %YoY %YoY 0% of the loss of FY15 FY16 10% 10% 11% 0% West Bengal 0% of the loss of FY16 FY17 2% 26% 26% 7% Jharkhand 5% of the loss of FY17 FY18 7% 10% 8% Gujarat 10% of the loss of FY18 FY19 4% 19% 13% Bihar 25% of the loss of FY19 FY20 7% 48% 48% 11% Rajasthan 50% of the loss of FY20 FY21 2% 39% 39% 8% Odisha Source: State Budgets 2017-18, JM Financial; 4% 16% 17% Haryana 6% 22% 24% 24% Punjab 12% 12% 28% 28% 21% UP 12% 12% 12% 8% Maharashtra 9% 9% 19% 22% 22% Tamil Nadu 1% 25% 13% Chattisgarh 5% 11% 10% Kerala 5% 14% 15% Karnataka 6% 24% 21% 21% AP 4% 23% 16% MP 4% 2% 45% 45% Telangana Aggregate Aggregate 100 100 19% 19% 14% 14% Source: State Budgets 2017-18, JM Financial JM Financial Institutional Securities Limited Page 12

14. FY18 State Budgets FY18 State Budgets 31 July 2017 Exhibit 36. Exhibit 36. Actual realisation of R Actual realisation of Revenue evenue expenditure expenditure Exhibit 37. Exhibit 37. Ac Actual realisation of tual realisation of Capital e Capital expenditure xpenditure FY17RE FY16A FY15A FY17RE FY16A FY15A 109% 109% 161% 161% 108% 108% 110% 106% 106% 104% 104% 105% 103% 103% 107% 107% 101% 101% 150% 100.2% 100.2% 102% 102% 100% 98% 98% 98% 98% 98% 98% 97% 97% 98% 98% 97% 97% 96% 96% 95% 96% 96% 89% 89% 130% 93% 93% 90% 89% 89% 107% 107% 110% 85% 101% 101% 107% 107% 101% 101% 100% 100% 96% 96% 99% 99% 91% 91% 93% 93% 93% 93% 80% 94% 94% 90% 90% 90% 74% 74% 75% 86% 86% 79% 79% 84% 84% 84% 84% 70% 78% 78% 70% 65% 53% 53% 60% 50% Chattisgarh Punjab Jharkhand Odisha Karnataka West Bengal Gujarat Aggregate Rajasthan Haryana MP Bihar Maharashtra Tamil Nadu AP UP Kerala Telangana Punjab Odisha Chattisgarh West Bengal Jharkhand Gujarat Karnataka Haryana Aggregate Bihar Rajasthan MP Maharashtra Tamil Nadu AP UP Kerala Telangana Source: State Budgets 2017-18, JM Financial Source: State Budgets 2017-18, JM Financial; * For FY17RE, we have adjusted for the one-off hike in Loans & advances for Punjab Gross Fiscal Deficit & the FRBM Gross Fiscal Deficit & the FRBM According to the Fiscal Responsibility & Budget Management Act (FRBM), the States and Centre, each should contain their GFD at 3% of their GDP. Exhibit 38 shows that the Centre has been determined on the fiscal consolidation path since FY13. However, states have shown signs of profligacy and some have breached the FRBM limit in the past. The 17 states analysed so far, yield a GFD of 2.60% in FY18BE (excluding the impact of UDAY-Exhibit 39). Although this is below the FRBM limit of 3%, upside risks include a) unaccounted costs of 7 revenue assumptions by some states in terms of State Excise (post SC order to ban liquor ban on State and Highways), Stamps & Registration fees (post the demonetisation slowdown in property market) and Sales Tax (given the lurking uncertainty of GST).  Top contributors to Top contributors to Gross Fiscal Deficit: Gross Fiscal Deficit: As expected, the highest contributors to the aggregate fiscal deficit are the largest states- UP, Maharashtra and Tamil Nadu. However, adjusting for size, we find that Punjab is the only state whose contribution to Indian GDP is less than 3%, but share in aggregate GFD is c.6% (Refer to Exhibit 40). This makes Punjab the most vulnerable state for FY18 Punjab the most vulnerable state for FY18. Other than Punjab, Odisha and Chhattisgarh have a relatively high contribution to GFD than their contribution to GDP.  Market Borrowings: Market Borrowings: Market borrowings form a major portion of financing the fiscal deficit for States. For FY18, overall gross market borrowings are expected to grow by 22%YoY vs 30% in FY17RE. While Maharashtra, UP and West Bengal have the largest share in gross market borrowings; Rajasthan (63%YoY) and West Bengal (40%YoY) have budgeted the highest YoY growth (excluding the impact of UDAY- Exhibit 42). Data for actual net market borrowings in FY17 (Refer to Exhibit 43) shows that the ratio of borrowing of States to Centre has been narrowing since ratio of borrowing of States to Centre has been narrowing since FY12: from 32% in FY12 to 80% in FY17 FY12: from 32% in FY12 to 80% in FY17. This has triggered fear of States’ market borrowings to soon approach that of the Centre. FYTD (as on 21 Centre net market borrowings ratio stands at 57% vs 42% last year. Gross market borrowings of states stood at INR 821bn (vs Centre INR 2190bn); a 22%YoY growth (vs Centre 4%YoY growth).  State State- -wise Debt levels: wise Debt levels: Exhibit 41 shows that West Bengal is the only state with a P Primary Surplus rimary Surplus; ; which means that its debt obligations are so high that on adjusting for interest payments, the fiscal deficit changes into fiscal surplus in FY18BE. A glance at Exhibit 42 shows that UP, Maharashtra, Tamil Nadu and West Bengal have the highest debt share in total debt for the 17 states. Adjusting for the size of the state; i.e. calculating the debt to GSDP ratio shows states with the largest d states with the largest debt overhang ebt overhang: namely 42% and 34% of GSDP respectively.  FRBM flexibility: FRBM flexibility: According the 14 eligible for flexibility in its borrowing limits if its Conditional on a zero revenue deficit, the state can avail additional borrowing up to a) 0.25% of GSDP if its interest payments to total revenue receipts (TRR) ratio is less th Pay Commission, b) farm loan waiver burden, c) over optimistic stJul’17), States to West Bengal is the only state with a shows Punjab and West Bengal are the Punjab and West Bengal are the th Finance Commission, a state in time period ‘’t’ is if its revenue revenue deficit is zero in “t deficit is zero in “t- -1” 1”. . JM Financial Institutional Securities Limited Page 13

15. FY18 State Budgets FY18 State Budgets 31 July 2017 than 10% in “t-1” and b) another 0.25% of GSDP if its debt to GSDP ratio is less than 25% in “t-1”. Based on this, Exhibit 45 shows that despite being ineligible for any sort of flexibility, FY17RE saw four states breaching FRBM norms, namely Punjab, Kerala, Rajasthan and AP. In FY18, two of these states, Punjab and Kerala, have budgeted numbers which wi budgeted numbers which will again violate FRBM ll again violate FRBM norms penal action against States in case of breach places fiscal discipline at the discretion of States. There is another caveat to the FFC recommendations. If a state is not able to fully utilize its sanctioned borrowing limit of 3% in year ‘t’ during the award period (FY16- FY19), it can avail the un-utilized borrowing amount in ‘t+1’ but within the award period. This means that 8 states, namely Chattisgarh, Karnataka, MP, Odisha, Telangana, Jharkhand, Gujarat and UP have the option of availing additional borrowing limits. The added fiscal space available to these is shown in Exhibit 44. Punjab and Kerala, have norms. However, absence of any Exhibit 38. Exhibit 38. Fiscal Consolidation by the Centre Fiscal Consolidation by the Centre Exhibit 39. Exhibit 39. Aggregate Aggregate GFD for 17 states GFD for 17 states Budget Estimate Actual Fiscal Deficit FRBM Target % of GDP With UDAY Without UDAY 8 3.68% 4% 7 6.8 3.31% 4% 6.5 3.02% 6.1 2.92% 6 3% 2.64% 2.61% 5.5 2.60% 2.50% 5.1 4.8 4.9 4.8 5 3% 4.6 4.5 4.1 4.1 3.9 2% 4 3.9 3.55 3.5 3.2 2% 3 1% 2 1% 1 0% FY16 FY17BE FY17RE FY18BE 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18BE Source: State Budgets 2017-18, JM Financial Exhibit 40. xhibit 40. State State- -wise Contribution to GFD and GSDP shows that Punjab may be the most vulnerable state in FY18 wise Contribution to GFD and GSDP shows that Punjab may be the most vulnerable state in FY18 FY17RE (W/O UDAY) FY17RE (W/O UDAY) Source: RBI, JM Financial FY18BE FY18BE Ratio between Ratio between Contribution to GFD Contribution to GFD and GDP and GDP Ratio between Ratio between Contribution to GFD and Contribution to GFD and GDP GDP Contribution Contribution to Indian GDP to Indian GDP Contribution Contribution to GFD to GFD Contribution Contribution to GSDP to GSDP Contribution Contribution to GFD to GFD States States (a) (b) (b)/(a) (a) (b) (b)/(a) West Bengal 6.5% 6.1% 0.93 6.8% 4.7% 0.70 Jharkhand 1.8% 1.6% 0.92 1.8% 1.7% 0.94 Gujarat 7.4% 4.8% 0.65 7.6% 5.7% 0.75 Bihar* 3.6% 5.4% 1.51 1.51 3.8% 4.4% 1.18 Rajasthan 4.9% 6.0% 1.22 4.9% 6.1% 1.23 Odisha 2.5% 2.9% 1.16 2.4% 3.5% 1.44 1.44 Haryana 3.6% 3.3% 0.9 3.7% 4.0% 1.08 Punjab 2.8% 11.8% 11.8% 4.19 4.19 2.8% 5.6% 2.04 2.04 Uttar Pradesh 8.2% 8.2% 9.6% 9.6% 1.17 8.6% 8.6% 10.5% 10.5% 1.22 Maharashtra 14.9% 14.9% 10.8% 10.8% 0.73 15.1% 15.1% 9.5% 9.5% 0.63 Tamil Nadu 8.8% 8.8% 9.2% 1.04 8.9% 8.9% 10.3% 10.3% 1.15 Chattisgarh* 1.8% 1.7% 1.06 1.6% 2.4% 1.44 1.44 Kerala 4.4% 5.6% 1.28 1.28 4.4% 6.3% 1.42 Karnataka 7.4% 5.8% 0.78 7.6% 8.2% 1.07 AP* 4.1% 4.6% 1.11 4.6% 5.6% 1.24 MP 4.3% 5.3% 1.26 4.4% 5.2% 1.18 Telangana* 4.3% 5.2% 1.22 4.5% 6.4% 1.43 1.43 Aggregate Aggregate 91 91.2 .2% % 100 100% % 93.3% 93.3% 100% 100% Indian GDP (INR bn) 1,51,837 1,68,475 Source Source: State Budgets, JM Financial; * GFD for FY17RE for Bihar, AP, Telangana and Chattisgarh is same for with & without UDAY due to lack of clarity on accounting of debt takeover of DISCOMS JM Financial Institutional Securities Limited Page 14

16. FY18 State Budgets FY18 State Budgets 31 July 2017 Exhibit xhibit 41 41. . Other Other Fiscal Fiscal Indicators Indicators- - Revenue Deficit & Primary Deficit Revenue Deficit & Primary Deficit FY17RE (W/O UDAY) FY17RE (W/O UDAY) FY18BE FY18BE Revenue Deficit as Revenue Deficit as % of GSDP % of GSDP Primary Deficit as Primary Deficit as % % of GSDP of GSDP GFD as % GFD as % of GSDP of GSDP Revenue Deficit as Revenue Deficit as % of GSDP % of GSDP Primary Deficit as Primary Deficit as % of GSDP % of GSDP GFD as % GFD as % of GSDP of GSDP States States West Bengal 1.0 ( (0 0.0 .0) ) 2.56 0.0 ( (0.6 0.6) ) 1.70** 1.70** Jharkhand ( (2.2 2.2) ) 1.0 2.53 ( (2.6 2.6) ) 0.8 2.29 Gujarat (0.3) 0.2 1.8 1.80 0 (0.5) 0.3 0.3 1.82 Bihar^ (1.5) 2.6 2.6 4.16 4.16 ( (2.3 2.3) ) 1.3 2.87 Rajasthan 1.2 1.0 3.37 0.2 0.6 2.99 Odisha (1.9) 2.0 3.2 (1.6) 2.3 2.3 3.5 3.5 Haryana 1.3 0.9 0.9 2.49 0.9 1.0 2.61 Punjab 2.7 2.7 8.7 8.7 11.55# 11.55# 3.2 3.2 1.8 4.96 4.96 Uttar Pradesh ( (2.6 2.6) ) 1.0 3.22 (0.8) 0.7 2.97 Maharashtra 0.6 0.9 2 2 0.2 0.3 1.53 1.53 Tamil Nadu 1.2 1.3 2.88 1.1 1.1 2.79 Chattisgarh^ (1.8) 1.9 2.92 (1.7) 2.4 2.4 3.49 Kerala 2.1 2.1 1.7 3.54 2.1 2.1 1.6 3.44 Karnataka (0.1) 1.1 2.16 (0.0) 1.5 2.61 AP^ 0.7 1.1 3.06 0.1 1.1 3.00 MP* (0.9) 1.9 3.46 (0.7) 1.3 2.87 Telangana^ (0.0) 2.2 3.35 (0.6) 2.0 3.48 Aggregate Aggregate Source Source: State Budgets, JM Financial; Adjusting for UDAY in FY18 also; * negative Primary deficit implies surplus; ** calculated after assuming a 15%YoY growth in Nominal GSDP for FY18BE; # falls to 4.4% if the one-off is adjusted for; ^GFD for FY17RE for Bihar, AP, Telangana and Chattisgarh is same for with & without UDAY due to lack of clarity on accounting of debt takeover of DISCOMS Exhibit xhibit 42 42. . Market borrowings & Debt levels for Market borrowings & Debt levels for various States various States Gross Gross Market Borrowings Market Borrowings 0.12 0.12 1.3 1.3 3.06 3.06 (0.02) (0.02) 0.9 0.9 2.60 2.60 Debt levels Debt levels Outstanding Outstanding debt levels debt levels Share in total Share in total FY17RE FY17RE FY18BE FY18BE Share in total Share in total % of GSDP % of GSDP States States %YoY %YoY %YoY %YoY INR bn INR bn % % % % West Bengal 10 10 33 40 40 3,336* 3,336* 9 9* * 34 34* * Jharkhand 2 14 15 789 2 26 Gujarat 7 60 60 15 2,169** 6** 17** Bihar 4 33 27 1,517 4 24 Rajasthan 6 4 63 63 2,648 7 32 32 Odisha 2 6 22 660 2 16 Haryana 4 12 4 1,175 3 19 Punjab 4 26 20 1,950 5 42 42 Uttar Pradesh 10 10 38 38 5 4,141 4,141 12 12 29 29 Maharashtra 10 10 74 74 13 4,064 4,064 11 11 16 Tamil Nadu 10 10 26 22 3,160 3,160 9 9 21 Chattisgarh 2 15 39 39 497 1 18 Kerala 5 31 25 2,094 6 28 Karnataka 8 10 24 2,305 6 18 AP 6 12 25 2,152 6 28 MP 5 16 33 33 1,618 5 22 Telangana 6 62 62 18 1,425 4 19 Aggregate Aggregate 22 22 35,700 35,700 100 100 23 23 100 100 30 30 Source Source: State Budgets, JM Financial; *FY17RE numbers; **this is only Public debt, where Public debt= Outstanding liabilities - liabilities of the Public account JM Financial Institutional Securities Limited Page 15

17. FY18 State Budgets FY18 State Budgets 31 July 2017 Exhibit 43. Exhibit 43. Net market borrowings Net market borrowings in INR trn in INR trn: States vs Centre : States vs Centre Exhibit 44. Exhibit 44. States that can avail States that can avail FY17RE’s un FY17RE’s un- -utilised fiscal space utilised fiscal space Available fiscal space Available fiscal space Permissible Permissible GFD in FY18 GFD in FY18 GFD GFD FY18BE FY18BE States States Un Un- -utilized space utilized space in FY17RE in FY17RE FY18 FY18 Chattisgarh 3.49 0.01 0.58 4.08 Karnataka 1.34 1.34 2.61 0.89 4.84 MP 0.04 3.49 0.01 3.54 Odisha 0.30 3.50 0.00 3.80 Telangana 0.15 3.48 0.02 3.65 Jharkhand 0.97 0.97 2.29 0.96 4.22 Gujarat 1.45 1.45 1.82 2.97 1.57 0.03 4.84 3.03 Uttar Pradesh Source: State Budgets, JM Financial 0.03 Source: Source: RBI, JM Financial; Includes UDAY JM Financial Institutional Securities Limited Page 16

18. FY18 State Budgets FY18 State Budgets 31 July 2017 th th Fin Fina ance Commission nce Commission Exhibit 45. Exhibit 45. States employing the Flexibilty as per the 14 States employing the Flexibilty as per the 14 Time Time period: (T) period: (T) Time Period: (T Time Period: (T- -1) 1) Reported GFD Reported GFD for FY18 for FY18 Available Fiscal Available Fiscal Space Space Interest Payments Interest Payments to TRR to TRR Debt to Debt to GSDP Ratio GSDP Ratio States States Flexibility employed Flexibility employed Revenue Deficit Revenue Deficit Yes/No As % of GSDP % of GSDP Criterion: less than 0% Criterion: Less than 10% Criterion: Less than 25% T T = = FY18BE FY18BE Eligible States Eligible States No 2.87 0.63 (1.5) 7 25 Bihar Yes 3.49* 0.01 (0.9) 8 21 MP +25 No 2.29 0.96 (2.2) 7 Jharkhand 18 Yes 3.48 0.02 (0.0) 9 Telangana < 25 No 1.82 1.57 (0.3) 16 Gujarat 18 No 2.61 0.89 (0.1) 9 Karnataka Yes 3.50 0.00 (1.9) 6 16 Odisha Yes 3.49 0.01 (1.8) 4 17 Chattisgarh In Ineligible States eligible States 27 Yes 3.44 Breach Breach 2.1 15 Kerala 34 No 1.70 1.30 1.0 20 West Bengal 23 No 2.61 0.39 1.3 16 Haryana** No 2.99 0.01 1.2 15 34 Rajasthan No 3.00 0.00 0.7 11 28 Andhra Pradesh 20 No 2.79 0.21 1.2 14 Tamil Nadu 16 No 1.53 1.47 0.6 13 Maharashtra 30 No 2.97 0.03 (2.6) +10 Uttar Pradesh 43 Yes 4.96 Breach Breach 2.7 23 Punjab T T = = FY17RE FY17RE Eligible States Eligible States 24 Yes 4.16 Breach Breach (2.6) 7 Bihar^ 15 No 2.92 0.58 (0.9) 5 Chattisgarh^ 24 No 2.16 1.34 (0.2) 9 Karnataka 20 Yes 3.46 0.04 (1.0) 8 MP Yes 3.20 0.30 (3.0) 5 15 Odisha Yes 3.35 0.15 (0.0) 10 16 Telangana^ < 25 No 2.53 0.97 (1.8) 8 Jharkhand < 25 No 1.80 1.45 (0.2) 17 Gujarat 30 Yes 3.22 0.03 (2.4) 9 Uttar Pradesh In Ineligible States eligible States Yes 3.06 Breach Breach 1.2 11 29 Andhra Pradesh^ No 2.49 0.51 1.6 17 21 Haryana** 0.78 0.3 14 16 No 2.22 Maharashtra Breach Breach 0.9 12 33 Rajasthan Yes 3.37 Breach Breach 1.6 16 27 Kerala Yes 3.54 0.12 1.0 13 17 Tamil Nadu No 2.88 No 2.56 0.44 1.0 21 33 West Bengal Yes 11.55 Breach Breach 2.2 24 33 Punjab Source: State Budgets 2017-18, JM Financial; * Assuming that the debt takeover for FY18 will be included in the fiscal deficit calculation; ** Indicators adjusted for UDAY; ^Fiscal Indicators for FY17RE for Bihar, AP, Telangana and Chattisgarh is same for with & without UDAY due to lack of clarity on accounting of debt takeover of DISCOMS JM Financial Institutional Securities Limited Page 17

19. FY18 State Budgets FY18 State Budgets 31 July 2017 APPENDIX I JM Financial Institutional Securities Limited JM Financial Institutional Securities Limited Corporate Identity Number: Corporate Identity Number: U65192MH1995PLC092522 U65192MH1995PLC092522 Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd. Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd. SEBI Registration Nos.: BSE SEBI Registration Nos.: BSE - - INZ010012532, NSE INZ010012532, NSE - - INZ230012536 and MSEI INZ230012536 and MSEI - - INZ260012539, Research Analyst Registe Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India. red Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India. Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: jmfinancial.research@jmfl.com | www.jmfl.com Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: jmfinancial.research@jmfl.com | www.jmfl.com Compliance Officer: Mr. Sunny Shah Compliance Officer: Mr. Sunny Shah | | Tel: +91 22 6630 3383 Tel: +91 22 6630 3383 | | Email: sunny.shah@jmfl.com INZ260012539, Research Analyst – – INH000000610 INH000000610 Email: sunny.shah@jmfl.com Definition of ratings Definition of ratings Rating Rating Buy Hold Sell Meaning Meaning Total expected returns of more than 15%. Total expected return includes dividend yields. Price expected to move in the range of 10% downside to 15% upside from the current market price. 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The Research Analyst(s) principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations, 2014); (a) do not have any financial interest in the company(ies) covered under this report or (b) did not receive any compensation from the company(ies) covered under this report, or from any third party, in connection with this report or (c) do not have any other material conflict of interest at the time of publication of this report. Research Analyst(s) are not serving as an officer, director or employee of the company(ies) covered under this report. While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. 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20. FY18 State Budgets FY18 State Budgets 31 July 2017 This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction. This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of and to observe such restrictions. 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