States' fiscal deficit could hit 4.5% of gross state domestic product: India Ratings

The upward revision was based on the fact that states were already facing lower-than budgeted share in central taxes and subdued own revenue growth, when the lockdown was imposed from March 25. States are likely to see further declines in these receipts in FY21 with the fallout of Covid-19, the report said.

The aggregate fiscal deficit of the states could hit 4.5 per cent of gross state domestic product (GSDP) in the current fiscal, said a report by India Ratings (Ind-Ra) on Wednesday.

The upward revision was based on the fact that states were already facing lower-than budgeted share in central taxes and subdued own revenue growth, when the lockdown was imposed from March 25.

States are likely to see further declines in these receipts in FY21 with the fallout of Covid-19, the report said. The states budgeted for a fiscal deficit of 2.5 per cent of GSDP for FY21.

Ind-Ra analysed the budgets of 20 states that accounted for 86 per cent of the country’s GDP and found that the nominal FY20 GSDP projections upwards of 10 per cent by most states were unlikely to be realised.

The aggregate revenue receipts of these states came in lower by 4.2 per cent than budgeted at Rs 24.79 lakh crore in FY20 revised estimates, primarily led by a 16.2 per cent reduction in the devolution of central taxes against budget estimates, the report said.

The ratings agency also revised its forecast for nominal GDP growth to 0.9 per cent in FY21 citing an economic downturn exacerbated by the extended lockdown.

State Borrowings

According to the report, gross state borrowings are expected to touch Rs 8.25 lakh crore, up from Rs 6.09 lakh crore projected earlier, to fund their fiscal deficit as pressure on the states to provide support to households and businesses through fiscal stimulus measures is likely to increase.

Amounting to 4.1 per cent of GDP, it would be higher than the central government's initial budgeted borrowings of Rs 7.8 lakh crore for FY21, before it was raised to Rs 12 lakh crore on May 8.

On May 17, the Centre increased the states’ borrowing limit to 5 per cent of GSDP from 3 per cent as part of the Atmanirbhar Bharat package, increasing the ceiling amount by Rs 4.28 lakh crore from Rs 6.4 lakh crore.

However, the increase would be linked to states undertaking specific reforms such as universalisation of One Nation-One Ration Card, ease of doing business, power distribution and urban local body revenues and achieving milestones based on them.