Given the subdued economic growth, state government finances are likely to continue witnessing revenue pressure in financial year 2020-21, India Ratings and Research (Ind-Ra) said on Wednesday. The agency, a part of Fitch group, has cut its outlook on state finances to stable-to-negative for FY21 from stable, citing higher revenue expenditure and outstanding GST compensation.
Ind-Ra has pegged states' aggregate fiscal deficit to be around 3 per cent of gross domestic product (GDP) in FY21, higher than the budgeted 2.6 per cent of GDP for FY20.
The agency expects states' aggregate tax revenue (including devolutions from the central government) and revenue receipts to grow 11 per cent and 9.9 per cent, respectively, in FY21.
The 15th Finance Commission, in its report for FY21, would make recommendations on revenue sharing between central and state governments for the period FY22-FY26, says Ind-Ra. Keeping this in view, the agency assumed that states' share in devolution to remain at 42 per cent in FY21.
The 15th Finance Commission, whose term has been extended to 30 October 2020 from 30 November 2019, is expected to submit its final report by end of October 2020.
"States' revenue account on aggregate to clock a deficit of 0.4 per cent of GDP in FY21 compared with a surplus of 0.01 per cent budgeted for FY20," it said.
According to Ind-Ra, a higher revenue expenditure than revenue receipts would, primarily, be led by the outgo related to interest payments in FY21 on account of higher borrowings in FY20.
Even the central government's finances are under pressure, which led to delays in payment of Goods and Services Tax compensation to states. If the delay continues, then it would adversely impact states' risk profile, warned Ind-Ra.
The agency expects the states' aggregate debt/GDP to rise to 27.5 per cent in FY21 from the budgeted 24.7 per cent for FY20. "States' aggregate debt burden would increase as states resort to fund the fiscal deficit by way of higher market borrowings," it said. Ind-Ra estimates the gross market borrowings of states to increase to Rs 6.09 lakh crore in FY21 from its estimated Rs 5.96 lakh crore for FY20.
Ind-Ra believes with capital expenditure bearing the brunt of the economic slowdown and lower growth in revenue receipts in FY20, the situation is unlikely to change significantly in FY21. It expects states' aggregate capex/GDP to come in marginally lower at 2.8 per cent in FY21 from the budget estimate of 3 per cent for FY20, as states attempt to control fiscal deficit through a curtailment in capex.
By Chitranjan Kumar