Despite a modest improvement of 40-60 basis points (bps) on-year, the aggregate indebtedness of states, measured as debt to gross state domestic product (GSDP), is expected to remain high at 31-32 per cent this fiscal, stated a report by CRISIL Ratings.
CRISIL Ratings studied 18 states, accounting for almost 95 per cent of the overall debt of state governments in India, to release the findings.
It added that states will continue to borrow more to fund their fiscal deficit, driven by rising capital outlays and persistent revenue deficit. High revenue expenditure, given high committed expenditure and inadequate revenue growth will keep revenue deficits wide. Further, states will keep supporting the funding plans of state-owned entities through guarantees.
Consequently, overall indebtedness, including debt and guarantees, will rise by approximately 10 per cent on-year to over Rs 96 lakh crore.
Anuj Sethi, Senior Director, CRISIL Ratings, said, “Revenue deficit will inch up to ~Rs 1.1 lakh crore this fiscal. States are expected to make capital outlays of ~Rs 7.2 lakh crore for key infrastructure segments such as roads, water supply and sanitation, and urban development. This may necessitate incremental borrowing of ~Rs 7.4 lakh crore in the current fiscal vis-à-vis Rs 7.1 lakh crore in the last, with the balance funded through interest-free loans from the central government.”
Per CRISIL, the rise in borrowings will increase the overall on-balance-sheet debt to approximately Rs 84 lakh crore for the states by the end of this fiscal. This, it added, will result in interest expenses of almost Rs 4.8-5 lakh crore this fiscal, whose servicing may require almost 13 per cent of the overall revenue of the states. This will be higher than the 10 per cent recommended by the Finance Commission.
Aditya Jhaver, Director, CRISIL Ratings, said, “Apart from on-balance-sheet borrowings, states continue to provide guarantees for borrowings of state-owned entities — mainly in the power sector, followed by those in the irrigation and water supply, and urban development sectors. We expect this to increase by Rs 0.8-1 lakh crore, or ~9 per cent on-year, in fiscal 2025, in line with trends witnessed in the recent past. Servicing of the majority of such guaranteed loans requires budgetary allocations from the states, and impacts their future financial flexibility and credit outlook.”
Consequently, CRISIL stated that the overall debt of states is likely to go up by around Rs 8.3 lakh crore this fiscal and top approximately Rs 96 lakh crore, keeping the indebtedness high at 31-32 per cent. This will be marginally lower than last fiscal owing to the expectation of a faster growth in nominal GSDP during fiscal 2025.
However, for a few fiscally prudent states, the indebtedness is in the range of 18-25 per cent, while for states with weak fiscal profile, it is as high as 40-42 per cent.
That said, CRISIL stated that any slowdown in economic activity can impact GSDP growth and pose a risk to our estimates. On the other hand, better-than-expected tax buoyancy or support from the Centre in the form of higher grants could result in lower dependency on borrowings.
