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Moderate revenue growth to put pressure on states: Ind-Ra

03 Feb '20

3 min read

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India Ratings and Research (Ind-Ra) has revised its outlook on state finances to stable-to-negative for fiscal 2020-21 from stable. It expects states’ aggregate fiscal deficit to come in close to 3 per cent of gross domestic product (GDP) in the fiscal, higher than the budgeted 2.6 per cent of GDP for 2019-20. It expects low GDP growth to continue in 2020-21.

State government finances are likely to continue witnessing revenue pressure in 2020-21, it said in a recent press release.

The rating agency expects states’ aggregate tax revenue (including devolutions from the central government) and revenue receipts to grow 11.0 per cent and 9.9 per cent respectively, in 2020-21.

The 15th Finance Commission has submitted its report for 2020-21. The term of 15th Finance Commission is extended to 30 October 2020 from 30 November 2019. The commission in its final report (to be submitted by 30 October 2020) will make recommendations on revenue sharing between central and state governments for the period from 2021-22 to 2025-26. Ind-Ra, therefore, has assumed states’ share in devolution to remain at 42 per cent in 2020-21.

It expects states’ revenue account on aggregate to clock a deficit of 0.4 per cent of GDP in 2020-21 compared with a surplus of 0.01 per cent budgeted for 2019-20. A higher revenue expenditure than revenue receipts would, primarily, be led by the outgo related to interest payments in 2020-21 on account of higher borrowings in 2019-20.

Due to the economic slowdown, even the union government finances are under pressure, leading to delays in payment of Goods and Services Tax compensation to states. Ind-Ra believes if the delay continues, then it would adversely impact states’ risk profile.

The agency expects the states’ aggregate debt/GDP to rise to 27.5 per cent in FY21 from the budgeted 24.7 per cent for 2019-20. States’ aggregate debt burden would increase as states resort to fund the fiscal deficit by way of higher market borrowings.

Ind-Ra estimates the gross market borrowings of states to increase to ₹6.09 trillion in FY21 from its estimated ₹5.96 trillion for 2019-20.

The burden of fiscal adjustment mostly falls on capital expenditure during the periods of subdued economic growth. Ind-Ra believes with capital expenditure bearing the brunt of the economic slowdown and lower growth in revenue receipts in 2019-20, the situation is unlikely to change significantly in the next fiscal.

Ind-Ra expects states’ aggregate capex/GDP to come in marginally lower at 2.8 per cent in 2020-21 from the budget estimate of 3 per cent for 2019-20, as states attempt to control fiscal deficit through a curtailment in capital expenditure.

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