Debt estimated to spike to 28.9% of GSDP in FY21 from 22.3% in FY20
Twelve major state governments may have to undertake an aggregate cut of Rs 2.5-2.7 lakh crore in their budgeted capital spending in FY21, on account of the pandemic-induced strain to their revenue receipts, rating agency Icra cautioned on Wednesday. The agency has also projected the aggregate debt of these states to deteriorate sharply to 28.9% of the gross state domestic product (GSDP) in FY21 from 22.3% in FY20.
The Icra study covered Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal; the combined GSDPs of these states accounted for three-fourths of the India’s GDP in FY19.
According to review of the accounts of 14 state governments by FE, in April-September this year, their capex was down 22% on year. It may be noted that this slippage was despite a low base; in the last financial year, the states had to cut capital expenditure by a quarter from original budget estimate (BE) in order to stick to the fiscal targets.
“The pandemic has dealt a sharp revenue shock to the state governments in the current fiscal. While the gap in GST compensation is largely proposed to be financed through additional borrowings, the expected substantial shortfall in central tax devolution would severely restrict the ability of the states to undertake growth-reviving capital expenditure in FY21,” Jayanta Roy, group head – Corporate Sector Rating, Icra, wrote.
Given their limited flexibility to curtail or defer revenue spending, Icra’s projections reveal a sharp widening of the combined revenue deficit of the states in the sample to Rs 5.8 lakh crore or 3.9% of Icra’s estimate of GSDP in FY21, from the level of Rs 82,200 crore budgeted by these states.
Funding a revenue deficit of this magnitude would absorb a huge part of the enhanced borrowing limit of the state governments, leaving many of them with little option other than substantially compressing capital expenditure. This would counteract the nascent economic recovery within their jurisdictions, and may further constrain a revival in revenues in the near term, Roy opined.
The disruption induced by the Covid-19 pandemic on state government finances, rendered the revenue and expenditure growth budgeted by the state governments for FY21 irrelevant. Led by large shortfalls in state GST collections, sales tax/VAT, as well as central tax devolution, Icra forecasts the revenue receipts of the 12 states to contract by a significant 19.3% in FY21, in stark contrast to the 14.3% y-o-y growth that had been budgeted for this year. Moreover, Icra expects the aggregate revenue expenditure growth of these states to be restricted to a muted 2.8% in FY21, compared to the budgeted expansion of 10.5%.