Credit rating agency ICRA estimates a 25 to 30 per cent spike in net State Development Loan (SDL) issuances to ₹6.2 to 6.4-lakh crore in FY21, from around ₹5-lakh crore in FY20, following the negative impact of the Covid-19 pandemic on the revenues of State governments even as their expenditure is likely to expand to address the crisis.

With SDL redemption estimated at around ₹1.4-lakh in both the years, the agency forecasts gross SDL issuance to expand by 19 to 23 per cent to a considerable ₹7.6 to 7.8-lakh crore in FY21, from ₹6.3-lakh crore in FY20.

At the individual State-level, ICRA assessed that those with a higher number of Covid-19 infections, returning migrant labour and daily wagers may undertake a sharper step-up in their expenditure. Those States with a larger dependence on goods and service tax (GST) compensation could experience greater revenue stress, enlarging their risk of fiscal slippage in FY21, it added.

Jayanta Roy, Group Head, Corporate Sector Rating, ICRA, said: “…the risk of fiscal slippage is expected to be higher for States that have a larger number of Covid-19 patients, as they may have to significantly ramp up spending on health-related services to contain this outbreak.

“Moreover, States that have witnessed the return of a considerable number of migrant labourers, and those that have a sizeable number of daily wage earners, could see a sharp rise in their revenue expenditure in FY21, if they choose to extend food and/or income support to such people.”

GST collection

Further, State governments, that have derived a substantial proportion of their revenue receipts from GST compensation in the recent years, could face a larger revenue and liquidity risk, as the GST cess collections would be adversely impacted in FY21, he cautioned.

ICRA said cautious spending on non-essential goods and services (tourism, hospitality, recreation) is likely to widen the gap between State governments’ actual State GST collections and the projected revenues in FY21.

This gap is required to be compensated to the States by the Government of India (GoI) through GST compensation, which is funded by the collections of GST compensation cess. Anticipating lower sales of some of the discretionary items (such as automobiles) on which the cess is levied and collected by the GoI, ICRA expects cess collections to be muted in FY21, which may have an impact on the magnitude and timing of release of GST compensation to State governments.

In addition to SGST, the Covid-19 outbreak will have an adverse impact on the other components of States’ own taxes, including sales tax/VAT (value added tax) on petroleum products, excise duty collections, and motor vehicle tax.

In ICRA’s assessment, the gross tax collections of the GoI will undershoot its FY20 Revised Estimates of ₹21.6-lakh crore by around ₹1.2 to 1.3 lakh crore. This will entail lower tax devolution to States of ₹42,000 to 55,000 crore, which will be adjusted in FY2021, it added.

The agency observed that additionally, the FY21 estimate of the gross tax revenues of the GoI of ₹24.2-lakh crore, is likely to be considerably reduced at a later stage, given the impact of the lockdown on economic activities.

Therefore, the actual central tax devolution to State governments in FY21 is expected to be appreciably lower than the FY21 Budget estimate of ₹7.8-lakh crore.

However, recent measures announced by the Reserve Bank of India, including a 30 per cent increase in the WMA (ways and means advances) limit of all States relative to the existing limits for H1 FY21, as well as an increase in the number of days a State can continuously be in overdraft (to 21 from 14), could provide some relief in addressing the liquidity tightness that State governments may experience during the ongoing fiscal.

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