Fiscal deficit of States likely to rise to 4.5% of GDP in FY21: Ind-Ra

Our Bureau Mumbai | Updated on May 26, 2020

Fallout of Covid crisis will be severe on the economy, says rating agency

India Ratings (Ind-ra) expects the aggregate fiscal deficit of States to rise to 4.5 per cent of gross domestic product (GDP) in FY21 as against its earlier forecast of 3 per cent due to the impact of the Covid-19 pandemic. It sees States resorting to higher market borrowings to fund the fiscal deficit.

The credit rating agency has revised upward its estimate of gross market borrowings of States to ₹8.25 lakh crore in FY21 from its earlier estimate of ₹6.09 lakh crore.

The pressure on State governments to provide support to households and businesses through fiscal stimulus measures is set to increase, Ind-Ra said in a report.

The agency believes the fallout of the Covid-19 crisis would be severe on the Indian economy. The extended nation-wide lockdown would exacerbate the economic downturn as the agency’s estimate pegs the nominal GDP growth at 0.9 per cent for FY21.

According to Ind-Ra, despite the relaxation in Covid-19 related restrictions in mid-May, the revenue balance of States in FY21 is set to worsen, particularly for those which already run sizeable revenue deficits. The agency estimates a higher revenue deficit of 2.8 per cent of GDP than its earlier forecast of 0.4 per cent.

As per Ind-Ra’s assessment, gross and net market borrowings of States in aggregate would constitute 4.1 per cent and 3.3 per cent of GDP, respectively, in FY21.

The agency while estimating fiscal deficit and market borrowings has considered the fiscal space available to States and the increase in the borrowing limit to 5 per cent from 3 per cent of Gross State Domestic Product (GSDP) for states, which was announced as part of the Central government’s Covid support package on May 17.

States’ borrowing ceiling is ₹6.4-lakh crore based on 3 per cent of GSDP for FY21. The enhanced limits would enable States to borrow an additional ₹4.28 lakh crore in FY21.

The agency said a part of the borrowing, however, is conditional and is linked to States’ performance on milestone-based achievement in at least three out of four reform areas outlined by the Centre.

Published on May 26, 2020

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