Indebtedness of states may hit decade-high of 36% this fiscal

The Covid-19 pandemic-induced lockdown and the consequent slump in economic activity will increase states’ indebtedness to at least 36 per cent this fiscal – the highest in a decade, according to rating agency CRISIL.

This is mainly attributable to falling goods and services tax (GST) collections and sticky revenue expenditure of states.

According to a press statement, CRISIL’s study of the top 18 states which account for 90% of the aggregate gross state domestic product (GSDP), indicates as much.

States’ overall revenues are estimated to decline almost 15% on-year this fiscal in line with a shrinking economy.

All the revenue sources of the states will take a hit, with almost 65% of the decline attributable to a fall in State GST collections, GST compensation payments, and tax devolutions to the states from the Centre’s own tax pool, which together form nearly 50% of states’ revenue receipts.

“Amid falling revenue receipts, states’ revenue expenditures would remain largely sticky due to high committed expenditures (related to salaries, pension and interest costs) and essential developmental expenditures (such as grants in aid, medical and labour welfare-related expenses). These cumulatively contribute to about 75-80% of the total revenue expenditure and will be difficult to cut down,” said Manish Gupta, Senior Director, CRISIL Ratings.

Given the stretch in revenue account, states may moderate their capital expenditures (capex) by around 30%, largely to remain within fiscal borrowing limits. Despite the moderation in capex, states’ gross fiscal deficit is likely to expand by around 65% on-year this fiscal and will increase states’ borrowing needs substantially.

“Overall debt of states, including guarantees and loans provided by the Centre to partly compensate for states’ GST shortfall, will increase sharply by around Rs 10 lakh crore this year to around Rs 68 trillion by the end of this fiscal. This will expand states’ indebtedness to at least 36% — an expansion of 600 bps on-year,” said Ankit Hakhu, Director, CRISIL Ratings

The math assumes a likely shrinkage of 2-4% in states' nominal GDP this fiscal. This will remain sensitive to the containment of pandemic and states’ policies towards unlocking the economy.

“We expect a substantial recovery in revenue collections to pre-pandemic levels next fiscal, supported by economic revival. Any delay in this will result in continuing elevated indebtedness and will be credit negative,” the CRISIL press statement said.