Fiscal deficit of states to hit peak of ₹8.7 lakh crore, says CRISIL

The States are headed for a fourfold expansion in their revenue deficit this fiscal over the last year due to far lesser tax collections, Crisil Ratings said in a report. Collections had been impacted on account of the enforced lockdowns and the consequent slump in economic activity in the country, it added.

“This will not only expand States’ aggregate gross fiscal deficit (GFD) to an all-time high of ₹8.7 lakh crore, or 4.7% of GSDP, but also skew its composition towards revenue deficit which is relatively less value-accretive towards future tax potential,” it said.

Tax collections may slowly recover with improving economic outlook. However, higher interest burden because of high debt funding of this year’s GFD, coupled with sticky revenue expenditures, may keep revenue deficits high for States and GFD composition skewed over the next 2-3 years, it added.

This will, in turn, increase the credit risk for States, the rating agency said.

Manish Gupta, senior director, Crisil, said, “Composition of GFD, apart from its level, is one of the critical indicators of credit quality of States. Higher contribution of capital expenditure in a State’s GFD composition is viewed positively as it supports capital formation, which improves the State’s tax potential.”

“In this fiscal, revenue deficit of States would contribute 70% of GFD, sharply higher than the average 15% seen over the past five fiscals,” he said.

That is because of 15% on-year decline in revenue this fiscal, the agency said.

It said revenue expenditures may also remain sticky as these were either committed (related to salaries, pension and interest costs), making it difficult to cut, or have been necessitated by the pandemic (such as grants-in-aid, medical- and labour welfare-related expenses).

“High revenue deficit will also compel States to moderate their capex to remain within fiscal borrowing limits thereby aggravating the GFD skew. To fund this expanded and skewed GFD, States are likely to borrow more this year,” it said.

This will increase their indebtedness, but not contribute much towards future tax potential, it added.

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Printable version | Mar 1, 2021 10:19:49 AM |

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