States fiscal deficit may rise to 4.5% of GDP: market borrowing seen at Rs8.25 lakh cr in FY21

As per the budgeted estimate for FY21, revenue and fiscal deficit are set at 0.02% and 2.5% of GSDP.

May 26, 2020 04:05 IST India Infoline News Service

The Indian states fiscal deficit is seen to further weaken as the country is battling with Covid-19 which has hit the economy. India Ratings has revised its forecast for the aggregate fiscal deficit of states.

The rating agency now expects states fiscal deficit at 4.5% of the GDP in FY21 compared to the previous forecast of 3%.

Ind-Ra says, "Like many countries across the globe, India has been hit by the COVID-19 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."

According to the rating agency, the state governments already were going through a lower-than-budgeted share in central taxes and subdued own revenue growth, when the 21 days economic lockdown was imposed from 25 March 2020 in India.

Aggregate revenue receipts of some 20 states were lower by 4.2% than budgeted at Rs24.79 lakh cr in FY20(RE), primarily led by a 16.2% reduction in the devolution of central taxes against BE.

Not only that, states own tax revenue receipts were lower by 2.2% in FY20(RE) than Rs12.04 lakh cr in FY20(BE).

As per the budgeted estimate for FY21, revenue and fiscal deficit are set at 0.02% and 2.5% of GSDP.

Majority states have announced their budgets before Covid-19 pandemic hit the country forcing a lockdown movement. The nominal gross state domestic product (GSDP) growth projected for FY20 by respective state governments is mostly upwards of 10%, for which Ind-Ra says, "is aggressive and unlikely to be realised."

In its note, Ind-Ra says the fallout of the COVID-19 crisis would be severe on the Indian economy.

Also, the extended nation-wide lockdown would exacerbate the economic downturn as the agency’s estimate pegs the nominal GDP growth at 0.9% for FY21, as per Ind-Ra

In all likelihood, Ind-Ra believes states will ace significant slippages from the FY21BE.

The agency estimates a higher revenue deficit of 2.8% of GDP than its earlier forecast of 0.4%.

Subsequently, Ind-Ra has revised upward its estimate of gross market borrowings of states to Rs8.25 lakh cr in FY21 from its earlier estimate of Rs6.09 lakh cr.

Talking about market borrowing, Ind-Ra said, "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."

Related Story