States’ Fiscal Deficit To Jump To 4.5% Of GDP in FY21, Says India Ratings 

Led by a massive spike in revenue deficit of 2.8% of gross domestic product, the aggregate fiscal deficit of India’s states will rise to 4.5% of GDP in financial year 2020-21 at Rs 8.5 lakh crore as against the earlier forecast of 3% of GDP, according to India Ratings.

As the nine-week long national lockdown to contain the spread of the coronavirus pandemic crippled the economy, the Centre allowed states to borrow 200 basis points more than the legally mandated 3% deficit, while the Centre itself upped its borrowing target by Rs 4.2 lakh crore.

But most states are not eligible to draw down the full 5% as the incremental borrowing comes with a lots of caveats.

According to a report by the domestic rating agency, the combined gross and net market borrowings of the states will be 4.5% and 3.3% of GDP, respectively, in the current fiscal.

States' borrowing ceiling is Rs 6.4 lakh crore based on 3% of state GDP for FY21 and the enhanced limit would enable them to borrow an additional Rs 4.28 lakh crore or 5% in FY21.

Of this, only 0.5% is immediate and without conditions as the remaining 150 bps is linked to states' achievement of milestones in at least three out of four reform areas outlined by the Centre.

The agency has also revised growth estimates for 20 states. "The fallout of the pandemic will be severe on the economy. The extended nation-wide lockdown will exacerbate the economic downturn as our estimate pegs the nominal GDP growth at 0.9% for FY21,” the report said.

India Ratings pointed out that states were already faced with a lower-than-budgeted share in central taxes and subdued own revenue growth, when the 21-day lockdown was imposed from March 25.

States, in all likelihood, will face significant slippages from the the current financial year, the rating agency said, the extent of slippage will vary depending on the pace at which economic activity limps back to normalcy.

“Despite the lockdown relaxations since mid-May, the revenue balance of the states in fiscal 2021 is set to worsen, particularly for those which already run sizeable revenue deficit,” the report said. “The states are set to see revenue deficit of 2.8% of GDP as compared to the earlier forecast of 0.4%.

Accordingly, the agency has revised upwards its estimate of gross market borrowings of the states to Rs 8.25 lakh crore in the current fiscal from its earlier estimate of Rs 6.09 lakh crore, as the states are expected to resort to higher market borrowings to fund the deficit.