Rating agency ICRA cautioned that 12 major state governments may have to undertake an aggregate cut of Rs. 2.5-2.7 trillion in their budgeted capital spending in FY2021, on account of the pandemic-induced strain to their revenue receipts. Additionally, ICRA has projected the aggregate debt of these states to deteriorate sharply to 28.9% of Gross State Domestic Product (GSDP) in FY2021 from 21.9% of GSDP in FY2019, and an estimated 22.3% of GSDP in FY2020.The sample studied by ICRA includes Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh and West Bengal, the combined GSDP of which accounted for three-fourths of the Indian GDP in FY2019.
According to Jayanta Roy, Group Head - Corporate Sector Rating, ICRA, "The pandemic has dealt a sharp revenue shock to the state governments in the current fiscal. While the gap in GST compensation is largely proposed to be financed through additional borrowings, the expected substantial shortfall in Central tax devolution would severely restrict the ability of the states to undertake growth-reviving capital expenditure in FY2021. Given their limited flexibility to curtail or defer revenue spending, ICRA’s projections reveal a sharp widening of the combined revenue deficit of the states in our sample to Rs. 5.8 trillion or 3.9% of ICRA’s estimate of GSDP in FY2021, from the level of Rs. 822 billion budgeted by these states for FY2021. Funding a revenue deficit of this magnitude would absorb a huge part of the enhanced borrowing limit of the state governments, leaving many of them with little option other than substantially compressing capital expenditure. This would counteract the nascent economic recovery within their jurisdictions, and may further constrain a revival in revenues in the near term."
The disruption induced by the Covid-19 pandemic on state government finances, rendered the revenue and expenditure growth budgeted by the state governments for FY2021, irrelevant. Led by large shortfalls in state GST collections, sales tax/VAT, as well as Central tax devolution, ICRA forecasts the revenue receipts of the 12 states to contract by a significant 19.3% in FY2021, in stark contrast to the 14.3% YoY growth that had been budgeted for this year. Moreover, ICRA expects the aggregate revenue expenditure growth of these states to be restricted to a muted 2.8% in FY2021, compared to the budgeted expansion of 10.5%.
Reflecting the adverse impact of the Covid-19 crisis on the tax revenues of the Government of India (GoI), and adjusting the excess taxes that were devolved to the states in FY2020, ICRA estimates the Central Tax Devolution to all state governments for FY2021 at Rs. 5 trillion, substantially lower than the amount of Rs. 7.8 trillion that had been budgeted by the GoI. Based on their inter se shares, ICRA estimates the Central Tax Devolution of the 12 states in its sample at Rs. 3 trillion for FY2021, 36.2% lower than the Rs. 4.7 trillion that had been included by the GoI for these states in its FY2021 Budget Estimates.
The borrowing ceiling prescribed by the GoI for state governments acts as a soft constraint to the size of the fiscal deficit. This, along with the size of the revenue deficit and capital receipts, if any, dictates the fiscal space that is available for capital spending in each financial year. This is acutely important in FY2021, given the extent of the revenue shock facing the states, the rating agency said.
For the states choosing Option 1 of the two borrowing options put forth by the GoI for FY2021, the minimum net market borrowing limit allowed is 4% of GSDP. The states can avail an additional 1% of GSDP, upon the completion of four sets of reforms in a time-bound manner. The rating agency expects most states to be able to complete at least one reform, namely One Nation One Ration Card within the prescribed timeline. Therefore, ICRA expects the likely net market borrowing limit for most of the state governments for FY2021 to be 4.25% of GSDP.
Loans from the Centre would be another key source for funding the fiscal deficit of the state governments in FY2021, driven by the GoI's decision to extend a loan of Rs. 1.1 trillion to all 28 states in lieu of the GST compensation shortfall. Moreover, the GoI has recently indicated that it would provide a 50-year interest-free loan of Rs. 100 billion to all the states for capex and related spending.
"ICRA estimates the financing envelope offered by the market borrowings and loans from the GoI for FY2021 at Rs.9.2 trillion for all the 28 states and two UTs, and at Rs. 7.3 trillion for the 12 sample states. We have used this estimate to calculate the fiscal space that would be available to the individual states in FY2021 to incur capital spending in FY2021. In our assessment, the aggregate funds available through the financing envelopes would not be sufficient for the budgeted capex and net lending of 11 of the 12 states in our sample. ICRA therefore expects a sizeable aggregate cut of Rs. 2.5-2.7 trillion in the capital spending by these 12 states in FY2021. Moreover, some states are assessed to report revenue deficits as large as the entire financing envelope available to them, implying severe cuts in capex may be on the anvil," Roy added.
The stock of debt of the 12 states in ICRA's sample is expected to spike by Rs. 7.3 trillion in FY2021. ICRA expects the aggregate debt-to-GSDP ratio of the 12 states to deteriorate sharply to 28.9% in FY2021 from 21.9% in FY2019 and an estimated 22.3% in FY2020.
