States’ fiscal deficit to moderate to 4.3% of GDP in FY22: India Ratings & Research

Our Bureau New Delhi | Updated on February 15, 2021

Outlook revised from stable to negative

With revision in GDP (Gross Domestic Product) forecast, India Ratings & Research (Ind-Ra) expects aggregate fiscal deficit of States for FY21-22 (FY22) to come in at 4.3 per cent of GDP compared to 4.6 per cent in FY 2020-21 (FY21).

Accordingly, the agency has revised the outlook on State finances for FY22 from stable to negative. The revision was made due to a sharper-than-expected contraction of 6.1 per cent in the nominal GDP for FY21. The agency estimates the nominal GDP to grow 14.5 per cent in FY22 and believes a gradual pick-up in revenue collections could lead to an improvement in the capital expenditure from FY22.

The share of capex in the total expenditure is likely to be higher at 15.5 per cent in FY22 than 10.5 per cent in FY21 “The burden of fiscal adjustment brought on by the pandemic was met by States through a sharp reduction in capex during FY21,” the agency said.

15th FC report

Further, it mentioned that due to the economic downturn, even the Union government finances are under pressure, leading to a lower-than-budgeted devolution of ₹5.50-lakh crore to States in FY21 as against the Budget estimate (BE) of ₹8.03-lakh crore.

The 15th Finance Commission (FC) has submitted its report for the period FY22 to FY26. As per its recommendations, the government in its FY22 Budget has committed to retain the vertical share of States in central taxes at 41 per cent.

The Budget for FY22 has budgeted ₹6.66-lakh crore for distribution out of the net proceeds of Central taxes.

Although the agency estimates the aggregate revenue receipt of the States to grow 8.4 per cent in FY22 from a decline of 0.6 per cent in FY21, the revenue deficit would persist in FY22. “Ind-Ra expects the aggregate revenue deficit of States to come in at 1.5 per cent of GDP in FY22,”, it said.

FC has laid out a fiscal consolidation roadmap for States. The aggregate deficit of States and debt ratios are projected to moderate gradually over FY22-FY26.

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Published on February 15, 2021
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