Total state fiscal deficits to rise by 20 bps to 2.8%

The aggregate fiscal deficit of the states is likely to moderate to 2.8% of GDP, 20 bps higher than the budgeted target, on the back of the states likely achieving a zero revenue balance to GDP ratio in FY19, said a report.

Accordingly, the outlook on the finances of the states in FY19 is stable, India Ratings said in its report.

The agency has revised downward the aggregate debt/GDP estimate to 24.4% for FY19 from its earlier estimate of 25.8%. The states have budgeted debt/GDP at 24.3% for FY19, marginally higher than 24% in FY18.

It estimates the states' aggregate revenue receipt to grow 13.9% in FY19 from the previous year. The estimate is marginally higher than the earlier forecast of 13.7%.

The higher borrowings will largely be used to fund the capex programme of the states.

The states have budgeted their combined gross market borrowings at Rs 4,40,720 crore in FY19. But the agency estimates the borrowings to be higher at Rs 4,65,280 crore this fiscal.

The states' aggregate market borrowings rose to Rs 1.1 lakh crore during April to July 2018, from Rs 98,200 crore over April to July 2017.

However, the likely improvement in the deficit ratios is vulnerable to the disproportionate revenue spends due to populist measures in the run-up to state and general elections in mid-2019, the report warns.

It believes that revenue from the goods and services tax would support tax revenue collection of the states in FY19. It expects the states' aggregate tax revenue including devolutions from the Centre to grow 16 per cent in FY19.

On the expenditure side, it expects growth in revenue expenditure to moderate to 11.2%, from 20.7% in FY18, as salary revisions of state government employees and the outgo related to farm loan waivers have already been absorbed to some extent in FY18 itself.

The report sees the interest payment/revenue receipt ratio to marginally moderate to 11.3% from 11.9% in FY18, due to a likely higher growth in revenue receipts. But it expects the ratios for Haryana, Tamil Nadu, Punjab, Uttarakhand, Kerala and Bengal to remain high in the range of 14 to 22% the year to March 2019.