States' indebtedness will remain high this fiscal at 33 percent, which is only a notch below the record high of 34 percent of their gross domestic products in FY21, as tax buoyancy will be offset by higher revenue expenditure and capital outlays, as per a report.
Rating agency Crisil on Tuesday said that aggregate indebtedness of states (debt-to-gross state domestic product, GSDP), is expected to be at 33 percent this fiscal, down a notch from 34 percent last year, despite the post-pandemic recovery bolstering revenue.
Stated differently, overall debt of the states, including guarantees, is likely to increase by Rs 7.2 lakh crore this fiscal to Rs 71.4 lakh crore, which is 33 percent of their combined GSDP, the report said, adding this math will not hold if there is a third wave or if the revenue does not clip at least 15 percent.
The debt-to-GSDP ratio had risen to a decadal high of 34 percent last fiscal after the first wave caught everyone by complete surprise. And that the sticky and elevated revenue expenditure and the need for higher capital outlay will keep borrowings up this fiscal.
However, GST compensation of Rs 1.4 lakh crore as against Rs 0.9 lakh crore last year will provide some respite, said the report, which is based on the data of the top 18 states, which account for 90 percent of the aggregate GSDP.
The states' revenue deficits stood at Rs 1.8 lakh crore in FY20, Rs 3.8 lakh crore in FY21 and are likely to be at Rs 3.4 lakh crore in FY22, their capital outlays were 3.7 percent of GSDP in FY20, 3.6 percent in FY21 and will be 4.4 percent in FY22.
This had their gross fiscal deficits at 5.1 percent in FY20, 7.6 percent in FY21 and 8.2 percent in FY22 and their total debt at Rs 55.7 lakh crore, Rs 64.2 lakh crore and Rs 71.4 lakh crore in FY22, respectively.
Overall revenue of the states is expected to rise 15 percent on-year this fiscal, following a 3 percent decline last fiscal.
As the economy recovers, two major components of revenue — GST and sales tax on petroleum products and liquor that comprises 30 percent of total tax mop-up — is likely to rebound strongly. GST could grow 20 percent supported by higher inflation and better compliance levels, while the sales tax is seen clipping at 25 percent, given the volume recovery and higher crude prices, according to the report.
However, revenue expenditure is likely to jump 10-11 per cent, negating the tax gains. As much as 75-80 percent of the revenue expenditure of the states go towards salaries, pensions, interest costs, and essential developmental expenditure like grants-in-aid, medical and labour welfare-related expenses.
Consequently, the net revenue recovery will be modest but the revenue deficit will come down from Rs 3.8 lakh crore (or 2 percent of GSDP) last fiscal to Rs 3.4 lakh crore (1.6 percent) this fiscal.
They will have to borrow to fund Capex/higher outlays towards key infrastructure segments like roads, irrigation, rural development etc.
States had budgeted a 55 percent on-year growth in the capital outlays at Rs 5.6 lakh crore this fiscal. But the agency sees this getting crimped to 20 percent given the past track record and already elevated fiscal deficit of close to 4 percent.
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