States' indebtedness will remain high this fiscal at 33 per cent, which is only a notch below the record high of 34 per cent of their gross domestic products in FY21, as tax buoyancy will be offset by higher revenue expenditure and capital outlays, as per a report.
Rating agency Crisil on Tuesday said that aggregate indebtedness of states (debt-to-gross state domestic product, GSDP), is expected to be at 33 per cent this fiscal, down a notch from 34 per cent last year, despite the post-pandemic recovery bolstering revenue.
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Stated differently, overall debt of the states, including guarantees, is likely to increase by Rs 7.2 lakh crore this fiscal to Rs 71.4 lakh crore, which is 33 per cent of their combined GSDP, the report said, adding this math will not hold if there is a third wave or if the revenue does not clip at least 15 per cent.
The debt-to-GSDP ratio had risen to a decadal high of 34 per cent last fiscal after the first wave caught everyone by complete surprise. And that the sticky and elevated revenue expenditure and the need for higher capital outlay will keep borrowings up this fiscal.
However, GST compensation of Rs 1.4 lakh crore as against Rs 0.9 lakh crore last year will provide some respite, said the report, which is based on the data of the top 18 states, which account for 90 per cent of the aggregate GSDP. The states' revenue deficits stood at Rs 1.8 lakh crore in FY20, Rs 3.8 lakh crore in FY21 and are likely to be at Rs 3.4 lakh crore in FY22, their capital outlays were 3.7 per cent of GSDP in FY20, 3.6 per cent in FY21 and will be 4.4 per cent in FY22.
This had their gross fiscal deficits at 5.1 per cent in FY20, 7.6 per cent in FY21 and 8.2 per cent in FY22 and their total debt at Rs 55.7 lakh crore, Rs 64.2 lakh crore and Rs 71.4 lakh crore in FY22, respectively. Overall revenue of the states is expected to rise 15 per cent on-year this fiscal, following a 3 per cent decline last fiscal.
As the economy recovers, two major components of revenue — GST and sales tax on petroleum products and liquor that comprises 30 per cent of total tax mop-up — is likely to rebound strongly. GST could grow 20 per cent supported by higher inflation and better compliance levels, while the sales tax is seen clipping at 25 per cent, given the volume recovery and higher crude prices, according to the report.
However, revenue expenditure is likely to jump 10-11 per cent, negating the tax gains. As much as 75-80 per cent of the revenue expenditure of the states go towards salaries, pensions, interest costs, and essential developmental expenditure like grants-in-aid, medical and labour welfare-related expenses.
Consequently, the net revenue recovery will be modest but the revenue deficit will come down from Rs 3.8 lakh crore (or 2 per cent of GSDP) last fiscal to Rs 3.4 lakh crore (1.6 per cent) this fiscal. They will have to borrow to fund Capex/higher outlays towards key infrastructure segments like roads, irrigation, rural development etc.
States had budgeted a 55 per cent on-year growth in the capital outlays at Rs 5.6 lakh crore this fiscal. But the agency sees this getting crimped to 20 per cent given the past track record and already elevated fiscal deficit of close to 4 per cent.
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