States' deficit, market borrowings to increase to 4.5% of GDP: Ind-Ra

India Ratings and Research (Ind-Ra) expects the aggregate fiscal deficit of states to now rise to 4.5 per cent of gross domestic product (GDP) in FY21 as against the agency's earlier forecast of 3 per cent.

Like many countries across the globe, India has been hit by Covid-19 pandemic. It has come at a time when the country was already facing a broad-based economic slowdown with revenues of both the central and state governments under pressure.

Ind-Ra said it evaluated the revised estimates for FY20 and FY21 budget estimates of 20 states. Since these states presented their budgets before the Covid-19 induced nation-wide lockdown, the nominal gross state domestic product (GSDP) growth projected for FY20 by respective state governments is mostly upwards of 10 per cent, which in Ind-Ra's opinion is aggressive and unlikely to be realised.

Ind-Ra believes the fallout of Covid-19 crisis will be severe on the Indian economy. The extended nationwide lockdown will exacerbate the economic downturn as the agency's estimate pegs the nominal GDP growth at 0.9 per cent for FY21 (FY20 forecast: 6.8 per cent).

State governments were already faced with a lower-than-budgeted share in central taxes and subdued own revenue growth, when the 21 days economic lockdown was imposed from March 25.

The 20 states considered in the analysis constituted nearly 86 per cent of the budgeted aggregate revenue receipts for FY20. The aggregate revenue receipts of these states came in lower by 4.2 per cent than budgeted at Rs 24.79 lakh crore in FY20, primarily led by a 16.2 per cent reduction in the devolution of central taxes against budget estimates.

States' own tax revenue receipts were lower by 2.2 per cent in FY20 (revised estimates) than Rs 12.04 lakh crore in FY20 (budget estimates). The revenue and fiscal deficit is budgeted at 0.02 per cent and 2.5 per cent of GSDP in FY21 (budget estimates).

"States, in all likelihood, will face significant slippages from the FY21 budget estimates. The extent of the slippage will vary depending on the pace at which economic activity limps back to life," said Ind-Ra on Tuesday.

Despite the relaxation in Covid-19 related restrictions in mid-May, the revenue balance of states in FY21 is set to worsen -- particularly for those which already run sizeable revenue deficits. The agency estimates a higher revenue deficit of 2.8 per cent of GDP than its earlier forecast of 0.4 per cent.

Ind-Ra has revised upward its estimate of gross market borrowings of states to Rs 8.25 lakh crore in FY21 from its earlier estimate of Rs 6.09 lakh crore. This is because the agency expects states to resort to higher market borrowings to fund the fiscal deficit.

"The pressure on state governments to provide support to households and businesses through fiscal stimulus measures is set to increase," said Ind-Ra.

Gross and net market borrowings of states in aggregate will constitute 4.1 per cent and 3.3 per cent of GDP respectively in FY21.

The agency while estimating fiscal deficit and market borrowings has considered the fiscal space available to states and the increase in the borrowing limit to 5 per cent from 3 per cent of GSDP for states, which was announced as part of the Central government's Covid support package on May 17.