In wake of the financial crisis due to COVID-19 and subsequent lockdown, the aggregate fiscal deficit of states is expected to increase to 4.5 per cent of gross domestic product (GDP) in FY21, says India Ratings and Research (Ind-Ra). The agency had earlier estimated the fiscal deficit to be 3 per cent of GDP this fiscal.
"Like many countries across the globe, India has been hit by the coronavirus pandemic and it has come at a time when the country was already facing a broad-based economic slowdown, with revenues of both the central and state governments under pressure," Ind-Ra said in its latest report.
Ind-Ra has evaluated the revised estimates (RE) for FY20 and FY21 budget estimates (BE) of 20 states. Since these states presented their budgets before the lockdown, the nominal gross state domestic product (GSDP) growth projected for FY20 by respective state governments is mostly upwards of 10 per cent, which in Ind-Ra's opinion is aggressive and unlikely to be realised.
According to the agency, the fallout of the coronavirus crisis would be severe on the Indian economy. The extended lockdown would worsen the economic downturn as the agency's estimate pegs the nominal GDP growth at 0.9 per cent for FY21, compared to 6.8 per cent in FY20.
Ind-Ra has also revised upward its estimate of gross market borrowings of states to Rs 8.25 lakh crore in FY21 from its earlier estimate of Rs 6.09 lakh crore. This is because the agency expects states to resort to higher market borrowings to fund the fiscal deficit. The pressure on state governments to provide support to households and businesses through fiscal stimulus measures is set to increase.
As per Ind-Ra's assessment, gross and net market borrowings of states in aggregate would constitute 4.1 per cent and 3.3 per cent of GDP, respectively, in FY21.
The agency while estimating fiscal deficit and market borrowings has considered the fiscal space available to states and the increase in the borrowing limit to 5 per cent from 3 per cent of GSDP, which was announced as part of the central government's COVID support package on 17 May. States' borrowing ceiling is Rs 6.4 lakh crore based on 3 per cent of GSDP for FY21. The enhanced limits would enable states to borrow an additional Rs 4.28 lakh crore in FY21. A part of the borrowing, however, is conditional and is linked to states' performance on milestone-based achievement in at least three out of four reform areas outlined by the centre, it said.
State governments were already faced with lower-than-budgeted share in central taxes, when the lockdown was imposed on 25 March. Ind-Ra's analysis of 20 states constituted nearly 86 per cent of the budgeted aggregate revenue receipts for FY20. The aggregate revenue receipts of these states fell short of budgeted estimates by 4.2 per cent at Rs 24.79 lakh crore in FY20(RE), primarily led by a 16.2 per cent reduction in the devolution of central taxes against BE. States' own tax revenue receipts were lower by 2.2 per cent in FY20(RE) than Rs 12.04 lakh crore in FY20(BE). The revenue and fiscal deficit is budgeted at 0.02 per cent and 2.5 per cent of GSDP in FY21(BE).
States, in all likelihood, will face significant slippages from FY21BE. The extent of slippage would vary depending on the pace at which economic activity limps back to life. Despite the relaxation in lockdown, the revenue balance of states in FY21 is set to worsen, particularly for those which already run sizeable revenue deficits. The agency estimates a higher revenue deficit of 2.8 per cent of GDP than its earlier forecast of 0.4 per cent.