States debt elevated amid moderate revenue, high capital outlays; Centre’s Rs 1 lakh cr loan to give respite

India’s states’ debts are expected to remain elevated, with indebtedness – measured by debt to gross state domestic product (GSDP) – seen at 31 per cent in FY23, mirroring the levels in the previous fiscal year, according to CRISIL. The rating agency, in its report, highlighted the need for higher capital outlays as the driving factor behind the buoyancy in borrowings of the states. In addition, the revenue accounts are likely to weaken marginally, yielding a revenue deficit of 80,000 crores in the current financial year.

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Tax collections from fuel, among growth-capping factors

“Flattish sales tax collections from fuel, modest growth in grants and discontinuation of GST compensation, after end-June 2022 in line with the GST (Compensation to States) Act, 2017, will moderate the growth,” said Anuj Sethi, Senior Director, CRISIL Ratings. Sethi added that despite the laggards, the overall revenue of states is expected to rise by 8 per cent on-year in FY23. “Strong State Goods and Services Tax collections and healthy central tax devolutions will be the major drivers this fiscal as well,” he said.

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Overall borrowings to increase by 6.5 lakh crore

“Overall balance sheet borrowings of states and off-budget borrowings like guarantees to power sector, irrigation entities etc are likely to increase by ~Rs 6.5 lakh crore to ~Rs 66.5 lakh crore by end-fiscal. This will keep states’ indebtedness at 30-31% for the current fiscal, despite benefitting from the strong nominal GSDP growth expectations in the current fiscal, said Aditya Jhaver, Director, CRISIL Ratings. It also includes the borrowings of the state to fund outlets supporting key infrastructure projects pertaining to roads, irrigation, and rural development, among other segments.

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Govt’s special assistance loan to deliver some respite

The central government’s special assistance loan of Rs 1 lakh crore to states will provide some respite to the states. The 50-year interest-free loan is over and above the allowed borrowings limit, 3.5 per cent of the GSDP, of the states. The allocation of funds are primarily to be used for the Pradhan Manti Gati Shakti Yojana, among other capital investments of the states such as digitising the economy.