The aggregate fiscal deficit of states for FY22 will likely be 4.3% of the gross domestic product (GDP) compared to 4.6% (revised) in FY21, India Ratings and Research said on Monday revising the outlook on state finances to stable for FY22 from stable-to-negative in FY21.
Earlier, the rating agency had forecast states’ fiscal deficit at 4.5% for FY21. It estimates the nominal GDP to grow 14.5% 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% in FY22 (2.9% of GDP) than 10.5% in FY21 (2.1% of GDP). The burden of fiscal adjustment brought on by the pandemic was met by states through a sharp reduction in capex during FY21,” said India Ratings.
Due to the economic downturn, even the Union government finances are under pressure, leading to a lower-than-budgeted devolution of Rs 5.5 lakh crore to states in FY21 (revised estimate) as against the budget estimate (BE) of Rs 8.03 lakh crore. “This is Rs 2.53 lakh crore lower than budgeted states’ share in central taxes and accounts for nearly 92% increase in their fiscal deficit in FY21 over FY21(BE),” it said.
The agency now estimates the aggregate revenue deficit of states to come in at 3.2%, higher than the earlier forecast of 2.8% of GDP in FY21. It estimates the aggregate revenue receipt of the states to grow 8.4% on year in FY22 from a decline of 0.6% in FY21. The revenue deficit is expected to be 1.5% of GDP in FY22.
The agency said the states’ debt burden is likely to persist in FY22 due to a combination of revenue deficit, some pick-up in capex and repayment of past market borrowings. It estimates the states’ aggregate debt/GDP to rise to 33.9% in FY22 from 32.8% in FY21. It has also estimated that the gross market borrowings of states will increase to Rs 8.38 lakh crore in FY22 from Rs 8.2 lakh crore in FY21. The net market borrowings would be Rs 6.4 lakh crore in FY22, up from Rs 6.8 lakh crore in FY21.