States' fiscal deficit likely to hit 4.2-5.5% of GSDP this fiscal year

Economists expect states’ fiscal deficit to touch anywhere in the range of 4.2 per cent to 5.5 per cent of their respective gross state domestic products (GSDPs) in this fiscal year. This is after the two options given by the Centre to them to meet the revenue loss under the goods and services tax (GST) system.

This may take the general deficit of the country – both the Centre’s and states’ – to 11-14 per cent of GDP in FY21. Even the Centre did not give a broad relaxation in terms of the ceiling for fiscal responsibility and budget management (FRBM) limit to states. It provided them an extra Rs 97,000 crore window if they choose the first option. Also, states have been given additional unconditional leeway by up to 0.5 per cent of their GSDP compared to what was provided to them under the Atmanirbhar Bharat package.

Under first of the options, the Centre offered states Rs 97,000 crore, which is the gap between their requirements for compensation caused by the GST system and the expected kitty in the compensation cess. 

Under this option, Rs 97,000 crore is an additional window over and above the 5 per cent provided now, say experts. The 5 per cent also includes 1 per cent for various reforms undertaken by the states, including power sector reforms and for the one nation one ration card.

In the second option, where states borrow the entire Rs 2.35 trillion, which is a gap between the revenue requirements for them (that also factors economic slowdown due to Covid) and compensation cess kitty, the states are allowed to go up to 5 per cent of their respective GSDP or the entire amount of borrowing over and above 4 per cent, whichever is higher.

“Our understanding is that now states will be able to incur borrowings and therefore a fiscal deficit of at least 4.17 per cent of GSDP and up to 5.5 per cent of GSDP in FY21, if all reforms are accomplished, depending on the option they choose,” said Jayanta Roy, senior vice-president and group head ICRA.

He said the first option appears to offer states a larger overall borrowing envelope. However, individual states will have to calculate which option lowers their debt servicing undergo. States have to service their interest payments if they choose to go for Rs 2.35 trillion borrowing, but the principal will be paid by the extension of cess beyond June 30. In the first option, both the interest and principal will be paid by extension of the cess. This will take the general fiscal deficit – both the Centre and states – to 11-14 per cent, said ICRA.

Former chief statistician Pronab Sen said if states go for the entire Rs 2.35 trillion and initiate all the reforms, their fiscal deficit may reach 5.2 per cent of GSDP. This is so because the 4 per cent of GSDP is allowed in part of the second option, plus the entire amount of borrowing which comes to about 1.2 per cent of GSDP.

On the other hand, the Centre’s fiscal deficit will already reach 6.25 per cent with additional borrowings it announced earlier at Rs 7.8 trillion. This may raise depend­ence on extra borrowings that the Centre may undertake.

Devendra Pant, chief economist at India Ratings, pegged fiscal deficit of states at 4.1 per cent to 4.5 per cent. It is, however, based on a much higher compensation gap at Rs 2.90 trillion compared to Rs 2.35 trillion estimated by the finance ministry. He pegged the general fiscal deficit of India at around 12 per cent of GDP in the current financial year.

Soumya Kanti Ghosh, State Bank of India’s group chief economic advisor, projected fiscal deficit of states at around 5 per cent of GSDP and the general deficit at 13 per cent of GDP.