Weak revenue, high capital outlays to keep States' debt at decadal high

The aggregate indebtedness of states, is expected to remain elevated at 30-31 per cent this fiscal, almost similar to 31.5 per cent of last fiscal, Crisil report said

The aggregate indebtedness of states, as measured by debt to gross state domestic product (GSDP), is expected to remain elevated at 30-31 per cent this fiscal, almost similar to 31.5 per cent of last fiscal, Crisil report said on Thursday, November 10.

According to the report, states‘ indebtedness has increased to a decadal high of 34 per cent in the Covid-19 hit fiscal 2020-21 after remaining range-bound between 25 per cent and 30 per cent during fiscals 2016-20 before cooling a bit to 31.5 per cent in fiscal 2022.

The report says that sticky revenue expenditure and the need for higher capital outlays, along with modest revenue growth, will keep borrowings high this fiscal. 

However, Centre’s special assistance of around Rs 1 trillion announced in the budget to all states for capital spending will come as some respite.

The Crisil report is based on an assessment of the top 18 states (Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Andhra, Telangana, Rajasthan, Bengal, Madhya Pradesh, Kerala, Haryana, Bihar, Punjab, Odisha, Chhattisgarh, Jharkhand and Goa), which account for 90 per cent of the aggregate GSDP.

The study also highlights that states borrow mostly to fund their revenue deficits and for capital outlays.

In fact, these states had a small surplus on the revenue account in fiscal 2022, owing to a healthy revenue growth of 25 per cent buoyed by healthy GST collections, strong devolutions from the Centre, sales tax recovery from fuels and support from the Centre through GST compensation loans.

According to Anuj Sethi, a senior director with Crisil, the overall revenue of states is expected to rise 7-9 per cent this fiscal driven by strong GST collections, and healthy central tax devolutions will be the major drivers, like last year. But flat sales tax mop-up from fuels, modest growth in central grants and discontinuation of GST compensation, after June 2022, will moderate their revenue growth.

Revenue expenditure, which accounts for 85-90 per cent of total revenue spends, is expected to rise by 11-12 per cent, driven by higher committed expenditure by way of salaries, pensions and debt servicing, essential developmental expenditures such as grants-in-aid, medical and labour welfare expenses, and rising subsidies to the power sector.

Due to this rise in expenditure, the revenue account will see a marginal weakening and will collectively see a deficit of Rs 0.8 trillion (0.3 per cent of GSDP) this fiscal. Adding to this, states will need to borrow to fund roads, irrigation, rural development etc.

The states will also need to borrow to fund outlays on key infrastructure segments such as roads, irrigation, rural development, etc. While states had budgeted an ambitious 40 per cent on-year capital outlay growth to Rs. 6.4 trillion this fiscal, CRISIL Ratings estimates capital outlay will rise 15-17 per cent, given the past track record, the report said.

Nevertheless, the Rs 1 trillion central assistance as 50-year interest-free loans to states will help partially meet capital outlay targets. Also, this loan is not included towards the borrowing limit of 3.5 per cent this year.

According to Aditya Jhaver, a director with the agency, the overall balance sheet borrowings of states and off-budget borrowings like guarantees to the power sector, irrigation entities, etc are likely to increase by Rs 6.5 trillion to Rs 66.5 trillion this fiscal, which will leave their indebtedness elevated at 30-31 per cent despite benefitting from the strong nominal GSDP growth expectations this fiscal.

-- With inputs from agencies