'States deficit up to 4.5% of GDP; Revenue gap at 2.8%'

States deficit jumps to 4.5% of GDP; Revenue gap seen to soar 7-times to 2.8%: Report

States have already been faced with a lower-than-budgeted share in central taxes and subdued own revenue growth, when the 21-day lockdown was imposed from March 25. (Credit: iStockPhoto)

Led by a massive spike in revenue deficit of 2.8 percent of GDP, the aggregate fiscal deficit of the states will rise to 4.5 percent of the GDP in 2020-21 at Rs 8.5 lakh crore as against the earlier forecast of 3 percent of GDP, says a report.

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As the nine-week long national lockdown to contain the spread of the coronavirus pandemic crippled the economy, the Centre has allowed the states to borrow 200 bps more than the legally mandated 3 percent deficit while the Centre itself has upped its borrowing targets by Rs 4.2 lakh crore.

But most states are not eligible to draw down the full 5 per cent as the incremental borrowing comes with lots of caveats.

The coronavirus pandemic has hit the economy at a time when it was already on a downhill drive for almost two years now and the nine-week long lockdown has completely stalled more than 80 percent of the economy.

According to a report by domestic rating agency India Ratings on Tuesday, the combined gross and net market borrowings of the states will be 4.5 percent of GDP and 3.3 percent of GDP, respectively, in the current fiscal (FY21).

States' borrowing ceiling is Rs 6.4 lakh crore based on 3 percent of GSDP for FY21 and the enhanced limit would enable them to borrow an additional Rs 4.28 lakh crore or 5 percent in FY21.

But of this, only 0.5 percent is immediate and without conditions as the remaining 150 bps more borrowing is linked to states' performance on milestone-based achievement in at least three out of four reform areas outlined by the Centre—reforms in ration cards (one-nation-one-card), power distribution, ease of doing business among others.

The agency has also revised budget estimates for FY2020 and FY21 of 20 states, finalized before the lockdown, the nominal gross state domestic product (GSDP) growth projected for FY2020 by these states is mostly upwards of an aggressive 10 percent.

"The fallout of the pandemic will be severe on the economy. The extended nation-wide lockdown will exacerbate the economic downturn as our estimate pegs the nominal GDP growth at 0.9 percent for FY21,” says the report.

States have already been faced with a lower-than-budgeted share in central taxes and subdued own revenue growth, when the 21-day lockdown was imposed from March 25.

These 20 states constitute nearly 86 percent of the budgeted aggregate revenue receipts for FY20, which stood at 4.2 percent lower than budgeted Rs 24.79 lakh crore, primarily led by a 16.2 percent reduction in the devolution of Central taxes.

States, in all likelihood, will face significant slippages from the FY21. The extent of the slippage will vary depending on the pace at which economic activity limps back to normalcy.

Despite the lockdown relaxations since mid-May, the revenue balance of the states in FY21 is set to worsen, particularly for those which already run sizeable revenue deficit and the states are set to see revenue deficit of 2.8 percent of GDP than the earlier forecast of 0.4 percent.

Accordingly, the agency has revised upwards its estimate of gross market borrowings of the states to Rs 8.25 lakh crore in FY21 from its earlier estimate of Rs 6.09 lakh crore, as the states are expected to resort to higher market borrowings to fund fiscal deficit. 

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