Amid falling revenue receipts in wake of the COVID-19 pandemic-induced lockdown and consequent slump in economic activity, states' indebtedness will hit decade-high of at least 36 per cent this fiscal, said rating agency CRISIL. The agency, however, expects a substantial recovery in revenue collections to pre-COVID levels next fiscal, supported by economic revival. Any delay in this will result in continuing elevated indebtedness and will be credit negative, it said.
"This is mainly attributable to falling goods and services tax (GST) collections and sticky revenue expenditure of states," said CRISIL in its latest report.
The report is based on the study of the top 18 states, which account for 90 per cent of the aggregate gross state domestic product (GSDP).
As per the report, states' overall revenues are estimated to decline almost 15 per cent on-year this fiscal in line with a shrinking economy. All the revenue sources of the states will take a hit, with almost 65 per cent of the decline attributable to a fall in state GST collections, GST compensation payments, and tax devolutions to the states from the Centre's own tax pool, which together forms nearly 50 per cent of states' revenue receipts, it said.
Manish Gupta, Senior Director of CRISIL Ratings, said, "Amid falling revenue receipts, states' revenue expenditures would remain largely sticky due to high committed expenditures (related to salaries, pension and interest costs) and essential developmental expenditures (such as grants in aid, medical and labour welfare related expenses). These cumulatively contribute to about 75-80 per cent of the total revenue expenditure and will be difficult to cut down."
The agency said that states may moderate their capital expenditures (capex) by around 30 per cent, largely within fiscal borrowing limits, due to stretch in revenue account. Despite the moderation in capex, states' gross fiscal deficit is likely to expand by around 65 per cent on-year this fiscal and will increase states' borrowing needs substantially, it said.
"Overall debt of states, including guarantees and loans provided by Centre to partly compensate for states' GST shortfall, will increase sharply by around Rs 10 lakh crore this year to near Rs 68 lakh crore by the end of this fiscal. This will expand states' indebtedness to at least 36 lakh crore - an expansion of 600 bps on-year," says Ankit Hakhu, Director, CRISIL Ratings.
The math assumes a likely shrinkage of 2-4 per cent in states' nominal GDP this fiscal. This will remain sensitive to containment of pandemic and states' policies towards unlocking the economy, the agency said.