States' indebtedness to remain elevated at 30-31% this fiscal: CRISIL

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The aggregate indebtedness of states – measured by debt to gross state domestic product (GSDP) – is expected to remain elevated at 30-31 percent in the current financial year 2022-2023, almost similar to around 31.5 percent seen in the previous fiscal, stated the largest domestic rating agency, CRISIL, in its report released on November 10.

Further, the report noted that sticky revenue expenditure and the need for higher capital outlays, along with modest revenue growth, will keep borrowings of the states up this fiscal.

That said, the Centre’s announcement in the last budget to provide special assistance of approximately Rs 1 lakh crore to all states for capital spending will provide some respite, it added.

CRISIL’s study of the top 18 states, which account for 90 percent of the aggregate GSDP, shows that states borrow mainly to fund deficits on the revenue account and incur capital outlays. It also noted that indebtedness had risen to a decade high of 34 percent in fiscal 2021 (after remaining rangebound between 25 percent and 30 percent during fiscal 2016-2020) before cooling a tad to 31.5 percent in fiscal 2022.

"In fact, states saw a small surplus on the revenue account in fiscal 2022, owing to a healthy revenue growth of nearly 25 percent on-year supported by healthy GST collections, strong devolutions from the central government, recovery in sales tax collections from fuel and support from central government through GST compensation loans, " the S&P-owned rating agency added.

On the other hand, CRISIL also stated that revenue expenditure is set to rise by 11-12 percent on-year, similar to last fiscal. "This will be driven by higher committed expenditure (related to salaries, pension and interest costs), essential developmental expenditure (such as grants-in-aid, medical and labour welfare related expenses) and rising subsidies to power sector, which together contribute to 85-90 percent of the total revenue expenditure."

In that regard, the revenue account of states will see a marginal weakening, to yield a revenue deficit of Rs 0.8 lakh crore (0.3 percent of GSDP) this fiscal. States will have to borrow to make up this shortfall, the rating agency added.

Commenting on the research report, Anuj Sethi, Senior Director, CRISIL Ratings, said: “Overall revenue of states is expected to rise around 7-9 percent on-year in the current fiscal. Strong State Goods and Services Tax collections and healthy central tax devolutions will be the major drivers this fiscal as well. But flattish sales tax collections from fuel, modest growth in grants and discontinuation of GST compensation, after end-June 2022 in line with the GST (Compensation to States) Act, 2017, will moderate the growth.”

In addition, CRISIL also mentioned that states will need to borrow to fund outlays on key infrastructure segments such as roads, irrigation, and rural development. "While states had budgeted an ambitious ~40 percent on-year capital outlay growth to ~Rs. 6.4 lakh crore this fiscal, CRISIL Ratings estimates capital outlay will rise ~15-17 percent, given the past track record," it added.

Moreover, Aditya Jhaver, Director, added, “Consequently, overall balance sheet borrowings of states and off-budget borrowings like guarantees to power sector, irrigation entities etc are likely to increase by ~Rs 6.5 lakh crore to ~Rs 66.5 lakh crore by end-fiscal. This will keep states’ indebtedness at 30-31 percent for the current fiscal, despite benefitting from the strong nominal GSDP growth expectations in the current fiscal.”

Nevertheless, the assistance of Rs 1 lakh crore from the central government in the form of 50-year interest-free loans to states will help partially meet the capital outlay target. Moreover, this loan is not counted towards the borrowing limit of 3.5 percent of GSDP for states this year, CRISIL concluded.