Not Just Centre, States Too Run The Risk Of Higher Fiscal Deficit: India Ratings
Fishermen cast nets at Marina Beach in Chennai, Tamil Nadu, India. Photographer: Prashanth Vishwanathan/Bloomberg

Not Just Centre, States Too Run The Risk Of Higher Fiscal Deficit: India Ratings

As India’s economic growth stutters, not just the central government, but states too run the risk of reporting higher fiscal deficit in 2019-20.

The aggregate fiscal deficit of states will touch 3 percent of the gross domestic product in the financial year ending March 2020 compared with the budgeted 2.6 percent, according to a research note by India Ratings and Research.

According to the unaudited finances of 23 states, fiscal deficit for April-October stood at 49.6 percent of the FY20 budgeted deficit compared to 39.5 percent a year ago. Based on the current tax growth, the ratings agency said, the overall shortfall in states’ revenue could touch Rs 39,032 crore in 2019-20.

“The slippage will likely be because of a decline in tax revenue, lower nominal GDP growth and higher expenditure by the states,” Devendra Pant, chief economist and head of public finance at India Ratings and Research, said in the report.

Nominal GDP growth stood at 7 percent in the first half of the ongoing fiscal against the 11 percent growth rate assumed by the central government and states for the entire year, indicating a significant shortfall in tax collections.

States’ tax collections fall under three revenue heads—their own tax revenue, share in central taxes and goods and services tax compensation. In aggregate, states have budgeted Rs 30.97 lakh crore in total revenue for FY20, which is 10.2 percent higher than the revised estimates for the previous financial year. Tax revenue was assumed to grow to Rs 22.15 lakh crore, an increase of 11.5 percent year-on-year.

SGST—a part of states’ own tax revenue—can see a shortfall of Rs 16,629 crore, India Ratings said. Under the GST regime, states are assured of at least 14 percent annual growth in state GST collections and are entitled for a compensation from the central government if SGST collections fall short.

While 12 states didn’t budget for compensation cess from the central government in FY20, they too may see lower SGST collection because of the ongoing slowdown, the report said.

Besides, states’ value added tax on petroleum products may see a shortfall as consumption of petroleum products fell to the lowest in seven years in April-November, it said.

States’ share in central taxes, budgeted to grow about 14 percent year-on-year for the full fiscal, contracted 2.7 percent until October, according to India Ratings. While states in aggregate have budgeted Rs 8.5 lakh crore as their share in central taxes, the union government budgeted their share at Rs 8.1 lakh crore.

Even to meet the Rs 8.1-lakh-crore target budgeted by the centre, Pant said, central taxes will have to grow at 15.1 percent during the rest of FY20, which looks unlikely.

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