Covid aftermath: States to see varying degrees of stress in FY22, says India Ratings report

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March 15, 2021 1:15 AM

Karnataka’s deficit and debt ratios will likely be lower than the estimates firmed up by the state government in its FY22 budget. But the state's fiscal deficit will still worsen from an elevated level of 3.2% in FY21 to 3.5% in the next fiscal.

The state's fiscal account was in surplus of Rs 110.83 billion, 0.7% of GSDP in FY20.The state's fiscal account was in surplus of Rs 110.83 billion, 0.7% of GSDP in FY20.

As the Covid-19 pandemic has strained finances of states, Uttar Pradesh is expected to witness a revenue deficit for the first time in 14 years in FY21. Similarly, Chhattisgarh would incur a record fiscal deficit of 6.5% of the nominal gross state domestic product (GSDP) in FY21, according to reports by India Ratings and Research.

Karnataka’s deficit and debt ratios will likely be lower than the estimates firmed up by the state government in its FY22 budget. But the state’s fiscal deficit will still worsen from an elevated level of 3.2% in FY21 to 3.5% in the next fiscal.

Despite an expected rebound in nominal growth in most states in FY22, their finances would continue to remain under pressure, thanks to havoc wrought by the pandemic. However, they will witness varying degrees of pressure in the next fiscal, in accordance with their inherent fiscal strength built up over the years.

According to India Ratings, Uttar Pradesh’s revenue receipts have dwindled in FY21, but the revenue spending could not be compressed accordingly. According to the revised estimate for FY21, UP’s revenue account is estimated to have a deficit of Rs 13,161 crore, 0.7% of GSDP, in FY21, against budget estimate of a surplus of Rs 27,451 crore, or 1.5% of GSDP. However, as per the FY22 budget, UP’s revenue account is estimated to return to a surplus of Rs 23,210 crore, 1.1% of GSDP.

UP’s fiscal deficit is estimated to increase to 4.2% of GSDP in FY21 from the budgeted 3%. It’s budgeted to stay unchanged at 4.2% in FY22 as well. The state’s fiscal account was in surplus of Rs 110.83 billion, 0.7% of GSDP in FY20.

As for Karnataka, India Ratings expects the state’s fiscal position to be supported by a likely higher-than-budgeted GSDP growth in FY22. At the core of Karnataka’s FY22 budget, is a pessimistic nominal GSDP assumption of Rs 17.02 lakh crore. This is even lower than the FY21 nominal GSDP of Rs 18.04 lakh crore. “It is quite baffling that the government of Karnataka is projecting a nominal GSDP growth rate of 6.2% y-o-y for FY21 (a Covid-19 impacted year) and a contraction of 5.6% for FY22 (a year of expected recovery),” it added.

In Chhattisgarh, revenue expenditure growth (9.76%) outstripped the rise in revenue receipts (7.01%) in FY21. Consequently, its revenue account is expected to witness a deficit of 3.5% of GSDP, against the budget estimate of a surplus of 0.7%. As per FY22 budget, the revenue account is estimated to remain in deficit — at 1% of GSDP, according to the India Ratings report.

The state’s fiscal deficit in FY22, however, is budgeted to narrow sharply from as much as 6.5% of GSDP in FY21 to 4.6%. With the exception of FY15, the state’s fiscal account has remained in deficit since FY12, though lower than the limits prescribed by the successive finance commissions (3.0%), the report showed.

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