States Fiscal Deficit Seen Jumping To 3% In FY21
Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

States Fiscal Deficit Seen Jumping To 3% In FY21

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Indicating rising stress levels in the finances of the states, India Ratings has revised downward the outlook on the states to stable-to-negative from stable as it expects aggregate fiscal deficit to touch 3 percent in 2020-21 due to falling growth and poor tax mop-up.

The states had budgeted a 2.6 percent deficit for fiscal year 2019-20.

Even the Centre is seen missing the 3.3 percent fiscal deficit target by a wide margin as tax collections, divestment proceeds and even dividends have been missing the target from the very beginning.

India Ratings also expects states' revenue account on aggregate to clock a deficit of 0.4 percent of gross domestic product in FY2020-21 compared with a surplus of 0.01 percent budgeted for FY2019-20.

A higher revenue expenditure than revenue receipts will primarily be led by the outgo related to interest payments in FY21 on account of higher borrowings in FY2019-20.

"Since we expect GDP growth to remain low even in FY21, states' finances are likely to continue witnessing revenue pressure, leaving a fiscal deficit of 3 percent," the agency said, adding accordingly "our outlook on the same is revised downwards to stable-to-negative from stable."

The states' aggregate tax revenue (including devolutions from the Centre) and revenue receipts to grow 11 percent and 9.9 percent, respectively, in FY2020-21.

The Centre owes close to Rs 60,000 crore in Goods and Services Tax refund to the states. The Centre had also promised to share 14 percent of the total GST collection with the states, but GST mop-up this year has been well below the projection.

The non-payment has forced many opposition ruled states to threaten to move the Supreme Court.

The agency warns that if the delay continues, it will adversely impact states' risk profile.

It assumes the states' share in devolution to remain at 42 percent in FY2020-21 assuming that the 15th Finance Commission which will submit the report by Oct. 30, 2020.

It expects the states' aggregate debt-GDP ratio to rise to 27.5 percent in the next fiscal from the budgeted 24.7 percent for FY2019-20. As a result, their aggregate debt burden will increase as states resort to fund fiscal deficit by way of higher market borrowings, which is slated to increase to Rs 6.09 lakh crore in FY21 from an estimated Rs 5.96 lakh crore in FY20.

The burden of fiscal adjustment mostly falls on capex during the periods of subdued economic growth.

With capex bearing the brunt of the slowdown and lower growth in revenue receipts in FY2019-20, the situation is unlikely to change in the next fiscal. As a result, the states' aggregate capex/GDP to come in marginally lower at 2.8 percent in FY21 from the budgeted 3 percent for FY2019-20.

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