The indebtedness of states had reached the decadal high of 34% in FY21. Sticky and elevated revenue expenditure and the need for higher capital outlay will keep borrowings up this fiscal, Crisil said.
The aggregate indebtedness of states, measured by debt to gross state domestic product (GSDP), is expected to remain elevated at about 33% in FY22, despite the post-pandemic recovery bolstering the shrinking revenue graph, Crisil said on Tuesday.
The indebtedness of states had reached the decadal high of 34% in FY21. Sticky and elevated revenue expenditure and the need for higher capital outlay will keep borrowings up this fiscal, Crisil said. That said, the Centre’s decision to provide GST compensation loans for the second straight year at a higher quantum of about Rs 1.4 lakh crore (Rs 90,000 crore in FY21) will provide some respite, it added.
Crisil’s assessment is based on study of the top 18 states, which account for 90% of the aggregate GSDP. States primarily borrow to fund deficits in the revenue account and incur capex. While the revenue deficits for states expanded in FY21 owing to the elevated revenue expenditures amidst constrained revenues, capital outlays were stagnant to manage the borrowing levels.
“Overall revenue of states is expected to rise ~15% on-year in fiscal 2022, following ~3% decline last fiscal. As the economy recovers, two major components of revenue — GST collections and sales tax from petroleum products — comprising ~30% of states’ revenue is likely to rebound strongly. The former could grow ~20% supported by higher inflation and better compliance levels, while the latter, by ~25%, given volume recovery and higher crude oil prices,” said Ankit Hakhu, director, Crisil Ratings.
However, a 10-11% on-year rise in revenue expenditure will negate the higher revenue inflows. This will be driven by higher committed expenditure (related to salaries, pension and interest costs) and essential developmental expenditure (such as grants-in-aid, medical and labour welfare related expenses) that cumulatively contribute to 75-80% of the total revenue expenditure.
Consequently, improvement in the revenue account will remain modest, with revenue deficit reducing from Rs 3.8 lakh crore (or 2% of GSDP) last fiscal to Rs 3.4 lakh crore (1.6% of GSDP) this fiscal. States will have to borrow to make up this shortfall.
What will add to the borrowing requirement are state outlays in key infrastructure segments like roads, irrigation, rural development, etc. This is necessitated to improve future tax potential and states are likely to put the foot on the pedal.
However, while the states had budgeted about 55% on-year growth in the capital outlays to Rs 5.6 lakh crore in FY22, Crisil estimates the growth to moderate to about 20% given the past track record and already elevated fiscal deficit levels of close to 4%, well above the historical levels.
“Overall debt of states, including guarantees, is likely to increase by ~Rs 7.2 lakh crore this year to ~Rs 71.4 lakh crore by end-fiscal. This will keep states’ indebtedness at an elevated level of 33%, only a notch lower than the decadal high of 34% seen last fiscal,” said Aditya Jhaver, director, Crisil Ratings. Crisil’s math assumes strong economic recovery with about 15% growth in nominal GSDP this fiscal.