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States' capital expenditure cut to cause GDP fall, estimates ICRA

While ICRA estimates an 11 per cent contraction in the overall GDP in FY21, it expects the contraction to narrow to 5-7 per cent in the Q3 and 1-2 per cent in Q4

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ICRA | India GDP growth

Dilasha Seth  |  New Delhi 

gdp
The rating agency projects widening of revenue deficit of the 12 states to Rs 5.8 trillion or 3.9 per cent of GSDP estimate in FY21.

The aggregate debt of 12 major states is estimated to worsen significantly, and their capital spending might decline sharply because of lower-than-expected goods and services tax (GST) revenue and shortfall in Centre’s devolution, rating agency said on Wednesday. This could lead to a 1-2 per cent contraction in Q4FY21.

The 12 states sampled by were Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh, and West Bengal. The combined gross state domestic product (GSDP) of these states accounted for three-fourths of the national GDP in 2018-19. The aggregate debt of these states is estimated to deteriorate to 28.9 per cent of GSDP in 2020-21 from 22.3 the previous year. estimated that these states might have to undertake an aggregate cut of Rs 2.5-2.7 trillion in their budgeted capital spending in FY21.

While ICRA estimates an 11 per cent contraction in the overall GDP in FY21, it expects the contraction to narrow to 5-7 per cent in the Q3 and 1-2 per cent in Q4. “We feel that there will be a contraction in the fourth quarter because of a huge squeeze in state governments’ capital expenditure, which will hold back recovery in many states,” said Aditi Nayar, principal economist, ICRA Ratings.

Nayar added that while the festive season has turned out to be better than expected, it was to be seen if the trend continues and the forecast will be revisited accordingly.

“The pandemic has dealt a sharp revenue shock to state governments in the current fiscal. While the gap in GST compensation is largely proposed to be financed through additional borrowings, the expected substantial shortfall in Central tax devolution would severely restrict the ability of the states to undertake growth-reviving in FY2021,” said ICRA.

Given the states’ limited flexibility to curtail or defer revenue spending, the rating agency projects widening of revenue deficit of the 12 states to Rs 5.8 trillion or 3.9 per cent of GSDP estimate in FY21.

“Funding a revenue deficit of this magnitude would absorb a huge part of the enhanced borrowing limit of the state governments, leaving many of them with little option other than substantially compressing This would counteract the nascent economic recovery within their jurisdictions, and may further constrain a revival in revenues in the near term,” said Nayar.

It has estimated a 19.3 per cent contraction in revenue receipts of the 12 states in 2020-21, compared to a 14.3 per cent growth budgeted for the current fiscal on account of large shortfalls in state GST collections sales tax/VAT and central tax devolution. Besides, the aggregate revenue expenditure growth of these states to be restricted to a muted 2.8 per cent in FY21, compared to the budgeted expansion of 10.5 per cent.

ICRA has estimated central tax devolution to all state governments for FY21 at Rs 5 trillion, lower than Rs 7.8 trillion budgeted for the fiscal owing to the adverse impact of the pandemic on Centre’s tax revenues.

As for borrowing, the rating agency expects net borrowing limit for most state governments at 4.25 per cent of GSDP in FY21 as it expects most states to be able to complete at least one reform, One Nation One Ration Card, within the prescribed timeline.

Loans from the Centre would be another key source of funding the fiscal deficit of state governments, driven by Centre’s decision to extend a loan of Rs 1.1 trillion to all 28 states in lieu of GST compensation shortfall.

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First Published: Wed, November 11 2020. 22:47 IST
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