Not paying the full GST compensations by the Centre is among the factors which may result in up to Rs 3 trillion cut in capital expenditure by the states in FY21, a report said on Wednesday.
The borrowing alternative offered by the Centre to make up for the shortfall in the promised compensation will lead to the states' fiscal deficits widening to 4.25 - 5.52 per cent, rating agency Icra has said in the report.
In the current fiscal, the compensation requirement of states has been estimated at Rs 3 trillion, of which Rs 65,000 crore would be funded from the revenues garnered by the levy of cess. This leaves a shortfall of Rs 2.35 trillion.
Finance Minister Nirmala Sitharaman had last month said the economy is facing an extraordinary 'Act of God' situation, which may result in economic contraction.
In the Goods and Services Tax (GST) Council meeting held on August 27, the government pegged the gap between the GST compensation requirement of the state governments for FY21 and the expected GST cess collections at Rs 2.35 trillion, Icra said.
The Centre had offered two options to the state governments for bridging this gap of Rs 2.35 trillion, which vary 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.
"We caution that the states may be forced to curtail their aggregate capital spending by as much as Rs 1-3.4 trillion in FY21, on account of the anticipated shortfalls in GST compensation and Central tax devolution (CTD), despite the options for additional borrowings put forth by the GoI," the agency said.
It can be noted that capital expenditure is considered as the most productive of any government's expenses because of its ability to lead to what is called trickle-down benefits.
The agency estimated the Centre's shareable taxes at Rs 13.4 trillion in FY21, 30 per cent lower than the budgeted amount of Rs 19.1 trillion. Given that it is expected to devolve 41 per cent of shareable taxes to the state governments in FY21, the CTD to the state governments will come at Rs 5.5 trillion.
It also estimates that Rs 48,400 crore of excess CTD was devolved to the states in FY20, which would need to be adjusted from the CTD for FY21.
"This would further reduce the estimated CTD in the current fiscal to Rs 5.0 trillion, a substantial Rs 2.8 trillion lower than the Rs 7.8 trillion budgeted by the GoI," it said.