State Borrowings Set To Surge In FY21 Amid Revenue Slowdown: ICRA
A roadside vendor places Indian rupee notes in a plastic container at his footwear stall in the Sitabuldi market in Nagpur. (Photographer: Dhiraj Singh/Bloomberg)

State Borrowings Set To Surge In FY21 Amid Revenue Slowdown: ICRA

Indian states may see a sharp jump in their borrowings in 2020-21, following a slowdown in tax revenues and a drop in transfers from the central government in FY20, according to rating agency ICRA.

The ratings agency estimates a 20-25 percent jump in the net issuance of state government bonds, known as state development loans in technical parlance, in 2020-21. Gross borrowings of states could rise to Rs 6.9- 7.1 lakh crore in FY21. Net borrowings are likely to be in the range of Rs 5.5-5.8 lakh crore, according to a release by ICRA on Friday.

The net issuance of state bonds is likely to exceed that of the central government, which is estimated at Rs 5.5 lakh crore in FY20, according to ICRA.

In FY20, gross borrowings of states were pegged at Rs 5.8-6 lakh crore, while net borrowings were set at Rs 4.4-4.6 lakh crore.

State Finances Remain Precarious

ICRA, like many others, flagged off the risk to state finances from lower and delayed transfers from the central government.

In particular, the rating agency estimated that GST compensation funds will fall short of the requirement by an estimated Rs 15,000- 25,000 crore in FY20. The government has transferred Rs 99,900 crore as GST compensation to states for February-September in FY20. ICRA estimates the balance in the compensation fund till December FY20 to be Rs 17,200 crore. Adjusting for the estimated GST compensation that would be required for October 2019-January 2020, the balance in the GST compensation fund would fall short of the collections by Rs 15,000-25,000 crore, ICRA said.

The shortfall will pose a risk to cash flow management of states in the ongoing financial year.

The revised estimate for the total central tax devolution to states was lowered to Rs 6.56 lakh crore from the budget estimate of Rs 8.09 lakh crore. This was because of the adjustment of FY19 of Rs 58,840 for the previous financial year and the downward revision in the central government’s tax collection estimate for FY20.

Given the amount already transferred by the centre to states, ICRA expects a sharp fall in the tax devolution to states in the fourth quarter of FY20 to Rs 1.8 lakh crore from Rs 2.75 lakh crore for the same quarter in the last financial year.

Lower tax devolution to states in fourth quarter of FY20 will pose a key risk to managing state finances and cash flows, ICRA said.

For FY21, tax devolution to states is expected to rise by 19.5 percent to Rs 7.84 lakh crore from Rs 6.56 lakh crore. However, if the centre’s gross tax revenue falls short of the revised estimates, states would feel the heat as well, ICRA said.

Commenting on the impact of the interim recommendations of the Fifteenth Finance Commission, ICRA said nine of the 28 states had seen a reduction in the share of the divisible pool for FY21. Karnataka and Kerala have seen the largest decline compared to the Fourteenth Finance Commission.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.