Indian states need more financial support from the government: S&P

Indian states’ weaknesses outweigh their strengths as they battle the Coronavirus (Covid-19) pandemic and they need financial support from the federal government, which is already dealing with drastically reduced revenue, according to S&P Global Ratings.
 

The Covid-19 pandemic could increase budget deficits and indebtedness of state governments as spending needs to exceed revenue collected, S&P Global analysts YeeFarn Phua and Ruchika Malhotra said in a report. The federal government and the Reserve Bank of India will remain key pillars for states’ fiscal framework and performance, they said.

Strengths

• Established record of extraordinary support from the central government and the Reserve Bank of India
• India’s well-established federation, with state governments having a strong voice in intergovernmental affairs
• Unified independent judiciary that interprets laws

Weaknesses

• Structural deficits due to persistent revenue-expenditure mismatch, exacerbated by COVID-19
• Sectorwide high indebtedness that reflects structural deficits
• Good transparency but weak accountability
• Lack of long-term financial planning

The pandemic has ravaged revenues of both the federal and state governments and threatens to slow the economy’s recovery from an unprecedented contraction last year. Prime Minister Narendra Modi’s government is on course to borrow about $22 billion this year to pay states for their loss of income due to a shortfall in a nationwide consumption tax collection.

Still, in the next two years Indian states will struggle to consolidate their deficits, which will will run at more than 25% of revenue, according to the analysts, who expect a meaningful consolidation in the year ending March 2024.

That could affect the pricing and eventual cost of bonds sold by states, the S&P analysts wrote.

“Covid-19 will create some permanent scars on states’ balance sheets,” Phua and Malhotra said in the report. “As the central government’s revenues stabilize further and gains from tax reforms start to materialize, we expect it to pass on some of the benefits to states via shared taxes and grants.”