Fiscal deficit of states to hit peak of Rs 8.7 lakh crore in FY21: Crisil

21 Jan 2021 Evaluate

The rating agency Crisil in its latest study report has stated that the combined fiscal deficit of the states will hit a peak of Rs 8.7 lakh crore or 4.7 per cent of their Gross Domestic Product (GDP) this fiscal (FY21) on the back of steep fall in tax collections owing to disruptions inflicted by the pandemic. it said revenue of the states have so badly fallen that as much as 70 per cent of the fiscal deficit is contributed by revenue deficit, which normally used to be only around 15 per cent. Economic activity slumped from late March last when the country was brought under a lockdown, and subsequently improved as the restrictions were eased.

As per the report, the pandemic has hit tax collections of the states and resulted in a near four-fold spike in their revenue deficits this fiscal over FY20. This will not only expand states' aggregate gross fiscal deficit to an all-time high of Rs 8.7 lakh crore, or 4.7 per cent of their gross state domestic product or GSDP but also skew its composition towards revenue deficit which is relatively less value-accretive towards future tax potential. Though tax collection may slowly recover with improving economic outlook, higher interest burden, because of the high debt funding of this year's gross fiscal deficit, coupled with sticky revenue expenditure, may keep revenue deficit high for the states and the deficit composition skewed over the next two-three years, the report said, adding that this will, in turn, increase their credit risk.

The agency said the analysis is based on the data from 18 large states, which account for over 90 per cent of aggregate gross state domestic product. The report noted that revenue expenditure may also remain sticky as these are either committed (related to salaries, pension and interest cost), making it difficult to cut or have been necessitated by the pandemic (such as grants-in-aid, medical and labour welfare-related expenses). High revenue deficit will also compel states to moderate their Capex so that they remain within fiscal borrowing limits, thus aggravating gross fiscal deficit. To fill the gap, states will be forced to borrow more this year, further increasing their indebtedness. Revenue collections are expected to reach close to the pre-pandemic level next fiscal, factoring in unlocking that began in July 2020 and a real GDP growth forecast of 10 per cent in FY22.

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Fiscal deficit of states to hit peak of Rs 8.7 lakh crore in FY21: Crisil

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