States’ indebtedness may hit decade-high of 36% this fiscal: CRISIL

The Covid-19 pandemic-induced lockdown and consequent slump in economic activity will increase States’ indebtedness to atleast 36 per cent this fiscal — the highest in a decade.

This is attributable to falling GST collections and sticky revenue expenditure of States, according to CRISIL. A study of the top 18 States, which account for 90 per cent of the aggregate GSDP, indicates this trend.

States’ overall revenues are estimated to decline almost 15 per cent year-on-year this fiscal in line with a shrinking economy. All of the States’ revenue sources will take a hit, with almost 65 per cent of the decline attributable to a fall in State GST collections, GST compensation payments, and tax devolutions to the States from the Centre’s own tax pool, which together form nearly 50 per cent of States’ revenue receipts.

Manish Gupta, Senior Director, CRISIL Ratings, said, “Amid falling revenue receipts, States’ revenue expenditures would remain largely sticky due to high committed expenditures (related to salaries, pension and interest costs) and essential developmental expenditures (such as grants in aid, medical and labour welfare related expenses). These cumulatively contribute to about 75-80 per cent of the total revenue expenditure and will be difficult to cut down.”

Given the stretch in revenue account, States may moderate their capital expenditures by around 30 per cent, largely to remain within fiscal borrowing limits. Despite the moderation in capex, States’ gross fiscal deficit is likely to expand by around 65 per cent y-o-y this fiscal, and will increase their borrowing needs substantially.

GDP shrinkage

Ankit Hakhu, Director, CRISIL Ratings, said, “Overall debt of States, including guarantees and loans provided by Centre to partly compensate for States’ GST shortfall, will increase sharply by approximately ₹10 lakh crore this year to ₹68 trillion by the end of this fiscal. This will expand States’ indebtedness to atleast 36 per cent, an expansion of 600 bps on-year.”

The math assumes a likely shrinkage of 2-4 per cent in States’ nominal GDP this fiscal. This will remain sensitive to the containment of the pandemic and States’ policies towards unlocking the economy.

CRISIL expects a substantial recovery in revenue collections to pre-pandemic levels next fiscal, supported by economic revival. Any delay in this will result in continuing elevated indebtedness and will be credit-negative.

For the report analysis, factors were considered in provisional financials for fiscal 2020 and actual financials for earlier fiscals; for some States, revised estimates were considered for fiscal 2020 as provisional financials were not available.

Actual decline in key revenue sources in H1:2020-21 is based on data available with the CAG. With economic activities picking up, substantial recovery is assumed in H2 FY2021.

Revenue expenditures will increase in fiscal 2021 due to high committed expenditures and elevated pandemic-related expenses.