States may cut FY21 capex by Rs 3 trillion due to GST shortfall: Icra

States may have to significantly cut expenditure by as much as Rs 3.4 trillion in the current fiscal if they are not paid full compensation relating to GST, investment information agency ICRA has said

States may have to significantly cut their expenditure by as much as Rs 3.4 lakh crore in the current fiscal if they are not paid full compensation relating to Goods and Services Tax (GST), investment information agency ICRA has said.

"The fiscal deficit of states may rise up to 4.25 to 5.52 per cent of gross state domestic product in FY21, curtailing their capital spending by Rs 1 lakh crore to 3.4 lakh crore, considering shortfalls in GST and central tax devolution (CTD)," it said in an update on state government finances.

The compensation requirement of states has been estimated at Rs 3 lakh crore of which Rs 65,000 crore will be funded from the revenues garnered by the levy of cess. This leaves a shortfall of Rs 2.35 lakh crore.

In contrast, rating agency ICRA estimated that the gap between the GST compensation requirement and the cess collections is more than the government's estimates. ICRA has pegged the gap at Rs 2.92 lakh crore.

However, the government has offered two options to the state governments for bridging the gap, which varies in terms of the amount that can be borrowed, the source of borrowing, rate of interest on borrowings, payment of interest, charge on cess collected after the five-year GST transition period ends in July 2022.

ICRA estimates the CTD to the states in FY21 at Rs 5 lakh crore, a substantial Rs 2.8 lakh crore lower than the Rs 7.8 lakh crore budgeted by the government partly on account of the adverse impact of the Covid-19 pandemic on consumption and the government' tax revenues as well as adjustment for excess devolution made in FY20.

"Given that borrowing limit set by the government acts as a soft constraint to the size of state governments' fiscal deficits, capital spending may have to be curtailed in aggregate by the states in FY21 by Rs 1 lakh crore to Rs 3.4 lakh crore in ICRA's assessment after taking into account the anticipated shortfalls in GST compensation and CTD despite the two options for additional borrowings put forth by the central government."

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