New Delhi: According to the latest budgetary data of 20 Indian states that represent more than 80% of the country’s real GDP, the fiscal deficit, which is basically the difference between their gross expenditure and gross revenue collection that is met through borrowing money, is set to be higher than their budget estimates for the current year.
India Ratings, a Fitch Group rating agency, which analyses the finances of the central and state governments, says the aggregate fiscal deficit of the 20 states for the current financial year will be marginally higher at 3.36% of GSDP than the budgeted 3.31% of GSDP (Rs 7.08 lakh crore), because of the higher capital expenditure than budgeted.
With an upward turn in the trajectory of interest rates and record borrowings by both union and state governments, the interest cost of the government is set to see a spike in the current financial year. The aggregate net market borrowings of the 20 states are budgeted at a record Rs 5.72 lakh crore in the current financial year.
India Ratings says despite a higher than budgeted fiscal deficit, it will remain comfortably within the limits prescribed by the 15th Finance Commission and agreed upon by the union government which is 4% of the respective state’s GSDP and an additional 0.5% of GSDP subject to certain conditions.
According to the data analysed by the agency, five states namely Himachal Pradesh, Madhya Pradesh, Meghalaya, Rajasthan and Telangana have budgeted their respective fiscal deficit at higher than or equal to 4% of GSDP.
Average state GDP target achievable
Although different states have assumed different nominal gross state domestic product (GSDP) for their FY 2022-23 budget estimate, the average combined nominal GSDP growth for 20 states works out to be 11.75%. It was 13.58% as per the revised estimates for FY 2021-22, 2.48% for FY 202-21 when the country was under a complete lockdown for three months and 9.48% in FY 2019-20, just before the Covid-19 pandemic hit the country.
According to the agency’s calculation, despite higher fiscal deficits, the assumed GSDP growth looks achievable. The agency assumes nominal GSDP growth rates in the range of 9%-15% for the 20 states. Based on this assumption, the estimated nominal GSDP growth of these 20 states in FY 2022-23 is estimated to be 11.55%.
India’s nominal GDP growth to be above 13%: India Ratings
India Ratings expects India’s nominal GDP growth to come in the range of 13.2%-13.6% in FY23. According to the calculations, the aggregate revenue account of the 20 states is expected to be in a deficit of 1% of the GSDP.
This is higher than the budgeted 0.8% of GSDP (Rs 1.7 lakh crore). Although 10 states have projected their revenue account to be in surplus in the current financial year as their economies come out of the impact of the Covid-19 global pandemic, the agency’s estimates suggest that eight out of the 20 states may witness a surplus in their revenue account in FY23.
The aggregate debt to GSDP ratio for the 20 states is budgeted at 27.23% for the current financial year, it was 26.53% as per the revised estimates for the last financial year. It is much higher than the average debt to GSDP ratio of 25.5% during the three year period before the pandemic i.e. FY 2018-21. The agency estimate suggests that it is likely to be similar at 27.32% in the current financial year.
Aggregate state debt to remain within limits
Though the average-debt-to-GSDP ratio will be nearly two per cent more in the current financial year in comparison with the ratio during FY 2018-21 period, nevertheless, it will be well within the level of 31.3% recommended by the 15th Finance Commission.
Except for Assam, the 19 out of 20 states for which the data for FY22 (revised estimates) and FY23 (budget estimates) is available, only six states namely Chhattisgarh, Gujarat, Haryana, Jharkhand, Mizoram and West Bengal have budgeted a moderation in their debt-to-GDP levels in FY23 budget estimates compared to the revised estimates for FY 2021-22.
Though the aggregate debt to state GDP level is expected to remain within the limit set by the finance commission, there are huge variations between different states. The states can be divided into four broad categories as per their debt level.
The first group consists of states such as Gujarat and Maharashtra which had low leverage of below 20% before the pandemic (FY 2019-20) and would be able to maintain that level in FY23 with a fiscal deficit to state GDP of below 3% during FY21-FY23 as per budget estimates.
The second group consists of states such as Karnataka, Telangana, Tamil Nadu, Haryana, Chhattisgarh, Madhya Pradesh and Assam which had a moderate level of leverage in FY 2019-20 at around 22.5%, but are likely to witness an increase in leverage to around 27% in FY 2022-23 with an average fiscal deficit to state GDP ratio of around 4.5% during FY21-FY23 as per budget estimates.
Madhya Pradesh remains an exception here, which would see its leverage rise to 33.3% in FY 2022-23 from 22.6% in FY20.
The third group contains states such as Bihar, Kerala, Jharkhand, Meghalaya, Mizoram, Andhra Pradesh, Arunachal Pradesh which had the leverage of around 30% in the pre-pandemic period and are expected to record a leverage ratio of around 35% in FY 202-23 as per budget estimates.
However, the average fiscal deficit-to-state-GDP ratio for states in this group varied in the range of 2.9%-6.5% in FY21-FY23 budget estimates.
According to India Ratings’ calculation, Bihar is expected to see its debt-to-GSDP ratio surge to 38.7% in the current financial (budget estimates) from 30.9% in FY 2019-20, due to a higher fiscal deficit which was an average of 6.5% in the last two financial years as per budget estimates.
The final group consists of states namely Rajasthan, West Bengal, Himachal Pradesh and Nagaland which started the pandemic period with a high leverage ratio of around 35% in FY 2019-20, which is expected to continue in the current financial year as well.
Interestingly, West Bengal is slated to contain its debt-to-GSDP at 34.2% in the current financial year from 35.9% in FY 2019-20.
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