FY19 Outlook: State Finances Stable, Despite Populist Pressures

India Ratings and Research (Ind-Ra) has assigned a stable outlook to the finances of Indian states for FY19. Ind-Ra expects the aggregate fiscal deficit of states to increase marginally to 3.1% of the gross domestic product (GDP) in FY19. However, the ratio is vulnerable to upside risks from the potential populist measures in the run-up to state and general elections.

Ind-Ra expects the aggregate debt/GDP to rise to 25.8% in FY19 from its forecast of 24.8% for FY18 - a modest increase from the earlier forecast of 24.3% for FY18. The agency believes states would channel a large part of borrowings toward capital expenditure. Ind-Ra believes the net market borrowings of states would increase to INR3.7 trillion in FY19 from its estimate of INR3.5 trillion for FY18. However, as a percentage of GDP, states' net market borrowings are likely to moderate to 2% in FY19 from the 2.1% estimated for FY18.

Ind-Ra estimates states' aggregate revenue receipt to grow 13.7% yoy in FY19 from 13.9% in FY18(f). Ind-Ra believes the compensation to states by the central government in case of revenue growth of taxes subsumed in GST falling below 14% for the first five years of implementation would insulate states from any revenue loss. Ind-Ra expects states' aggregate tax revenue (including devolutions from the centre) to grow at 14% in FY19 (FY18(f): 15.3%).

On the expenditure side, Ind-Ra believes the share of states' selected committed expenditure (includes salary, pension and interest payment) in revenue expenditure could marginally decline to 47.09% in FY19 from 47.27% in FY18(f). The agency, however, expects the ratio to move up in select states such as Maharashtra, Karnataka, Himachal Pradesh and Tamil Nadu in FY19. States' aggregate capex/GDP ratio is likely to improve marginally to 3.17% in FY19 from the budget estimate of 3% for FY18.

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