Fiscal health of Indian state govts to worsen due to Covid-19: S&P

This is despite a likely rebound in the economy over the next 12-24 months, says rating agency

The Covid-19 pandemic could worsen structural deficits and indebtedness of state governments in India. This is despite a likely rebound in the economy over the next 12-24 months, according to rating agency Standard and Poor's (S&P).

The rating agency in a statement said, “It will be hard for state governments to rapidly scale down elevated expenditures induced by Covid-19. The pandemic has led to increased spending on healthcare, social safety, and digital infrastructure. We therefore project balance after capital accounts deficit to average 30 per cent of revenues over 2019-2023."

The pandemic has further pushed out states' consolidation targets under Fiscal Responsibility and Budget Management Act (FRBM) from FY25. State governments have found it difficult to keep to the FRBM targets, given the increasing gap in their revenue-raising capacity and expenditure responsibilities even prior to Covid-19. Now, they are likely to have significantly larger deficits in 2020-2021 followed by a slow and painful consolidation, it added.

On the positive side, S&P said it believes the extraordinary support from the central government and the Reserve Bank of India will remain a key pillar for states' fiscal framework and performance. The central bank has helped states with their funding needs and in navigating the uncertainties of Covid-19.

A significant risk for the fiscal framework and performance of Indian states will be the Indian Rs three trillion power sector reforms announced in the FY22 budget presented by the central government. While details of the proposed reform are not known yet, meaningful state participation is likely.

The significant linkages between the power distribution companies (discoms) and states have led to the indebtedness of the discoms shifting to states.

India's stronger growth than peer countries has been a key factor underpinning the sustainability of states' fiscal performance. The country's economic growth will remain above average over the next few years, the agency added.