Jayanta Roy, Group Head - Corporate Sector Rating, ICRA Ltd, said: “In ICRA’s assessment, the risk of fiscal slippage is expected to be higher for states, which have a larger number of Covid-19 patients, as they may have to significantly ramp up spending on health-related services to contain this outbreak. Moreover, states which have witnessed the return of a considerable number of migrant labourers, and which have a sizeable number of daily wage earners, could see a sharp rise in their revenue expenditure in FY2021, if they choose to extend food and/or income support to such people.”
“Further, state governments, which have derived a substantial proportion of their revenue receipts from GST compensation in the recent years, could face a larger revenue and liquidity risk, as the GST cess collections would be adversely impacted in FY2021,” Mr. Roy added. Cautious spending on non-essential goods and services (tourism, hospitality, recreation etc.) is likely to widen the gap between the state governments’ actual state GST (SGST) collections and the protected revenues in FY2021. This gap is required to be compensated to the states by the Government of India (GoI) through GST compensation, which is funded by the collections of GST compensation cess. Anticipating lower sales of some of the discretionary items on which the cess is levied and collected by the GoI, such as automobiles, ICRA expects the cess collections to be muted in FY2021, which may have an impact on the magnitude and timing of release of GST compensation to the state governments. In addition to SGST, the Covid-19 outbreak would have an adverse impact on the other components of states own taxes, including sales tax/VAT on petroleum products, excise duty collections, and motor vehicle tax.
In ICRA’s assessment, the gross tax collections of the GoI would undershoot its FY2020 Revised Estimates of Rs. 21.6 trillion by around Rs. 1.2-1.3 trillion. This would entail lower tax devolution to states of Rs. 420-Rs. 550 billion, which would be adjusted in FY2021. Additionally, the FY2021 estimate of the gross tax revenues of the GoI of Rs. 24.2 trillion is likely to be considerably reduced at a later stage, given the impact of the lockdown on economic activities. Therefore, the actual central tax devolution to the state governments in FY2021 is expected to be appreciably lower than the FY2021 Budget Estimate of Rs. 7.8 trillion.
However, recent measures announced by the Reserve Bank of India including a 30% increase in the WMA limit of all the states relative to the existing limits for H1 FY2021, as well as an increase in the number of days for which a state can continuously be in overdraft (to 21 from 14), could provide some relief in addressing the liquidity tightness that the state governments may experience during the ongoing fiscal.