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Slow growth, infra spending in India to keep states' deficit high: Moody's

The government is facing growing challenges in meeting its medium-term fiscal consolidation goals amid a slowing economy, which has been driven by a combination of both cyclical and structural factors

Abhijit Lele  |  Mumbai 

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Representative image Photo: iStock

Rating agency Moody’s said on Wednesday that slowing growth and continued infrastructure spending needs would keep deficits at state-level elevated, further challenging India's fiscal consolidation efforts.

The government is facing growing challenges in meeting its medium-term fiscal consolidation goals amid a slowing economy, which has been driven by a combination of both cyclical and structural factors.

Indian sates, which do not generate sufficient own-source revenue for their spending needs and remain dependent on central government grants, have recorded larger deficits in recent years. The implementation of the goods and services tax (GST) further reduced states’ share of own-source revenues, the rating agency said in a statement.

Moody’s on Wednesday released report “Regional & Local Governments - India: Indian states face challenges in reducing deficits, constraining government fiscal consolidation”.

Early this month, Moody’s cut India’s credit ratings outlook to negative on concerns that the economic slowdown would be prolonged and debt would rise. The foreign currency rating was retained at Baa2, the second-lowest investment grade score.

Moody’s projected a budget deficit of 3.7 per cent of gross domestic product (GDP) for the year ending March 2020, a breach of the government’s target of 3.3%. This is an expected outcome of slower growth and a surprise corporate-tax cut.

The state governments remain reliant on central government transfers and the GST has reduced flexibility in their revenue sources. The introduction of the GST replaced many indirect taxes previously levied by the states, reducing the share of own-source revenue in their total revenue. As a result, states now rely on the central government, or the GST Council, for a majority of their revenue, with variations across states.

The GST revenue has been below expectations since its launch, though the central government has agreed to compensate states for any revenue shortfalls due to the GST for five years.

Moody’s said slowing revenue growth and high infrastructure needs would constrain states’ finances. Persistent spending pressures and slower economic growth would result in continued fiscal deficits, it added.

For fiscal 2020, the central government deficit is expected to be about 3.7% of gross domestic product (GDP), slightly wider than the 3.4% posted in fiscal 2019. The fiscal deficit for states would be around 3% for states, taking combined deficit of central and state governments to about 6.7 per cent.

"Recurring state deficits will lead to greater debt accumulation. We expect Indian states’ debt burden to increase to fund significant infrastructure needs. States' gross borrowing needs are budgeted at Rs 7.5 trillion ($104 billion or 3.4% of national GDP) for fiscal 2020, a 28% increase over fiscal 2019 levels," said Moody's.

"State-level deficits will in turn continue to challenge fiscal consolidation at the general government level. States’ revenue outlook remains sensitive to growth in central government transfers and nominal GDP, with variations across states," Moody’s added.

First Published: Wed, November 27 2019. 11:24 IST
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