The aggregate fiscal deficit of states will touch 3 per cent gross domestic product (GDP) in FY20 against the budgeted figure of 2.6 per cent, India Ratings and Research (Ind-Ra) said on Tuesday.
The fiscal slippage will originate from a decline in tax revenue, a lower nominal GDP and higher expenditure, it said.
In aggregate, states have budgeted Rs 30.97 lakh crore in the total revenue for FY20 while tax revenue growth has been assumed to grow 11.5 per cent.
States' tax collections fall under three different revenue heads -- states' own tax revenue (SOTR, state goods and service tax (SGST)), share in central taxes (central goods and service tax (CGST)) and grants (GST compensation).
SOTR remains the dominant contributor to the state revenues with 44 per cent share in the total budgeted revenue in FY20 followed by states' share in central taxes.
SGST is part of SOTR. Under the GST regime, states are assured of at least 14 per cent annual growth in SGST collections and entitled for compensation from the Centre if their SGST collections growth is less than 14 per cent.
A total of 12 states -- Andhra Pradesh, Arunachal Pradesh, Kerala, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Telangana, Tripura and Uttar Pradesh -- have not budgeted for compensation cess from the centre in FY20.
However, said Ind-Ra, they may also witness lower SGST collection than budgeted due to the prevailing growth slowdown. The other major components of SOTR are electricity duty and state value-added tax on petroleum products.
Growth of consumption of petroleum products at 2.2 per cent in FY20 so far (April to November) is lowest in the last seven years. Ind-Ra estimates the shortfall on account of SGST collection in FY20 could be Rs 16,629 crore.
States' share in central taxes has been budgeted to grow 13.98 per cent year-on-year in FY20. However, it contracted 2.7 per cent year-on-year in FY20 (April to October), exerting pressure on states' fiscal deficit.
While states in aggregate have budgeted Rs 8.5 lakh crore as their share in central taxes, the Central government has budgeted states' share at Rs 8.1 lakh crore in the FY20 Union Budget.
Even to meet the Rs 8.1 lakh crore target, central taxes will have to grow at 15.1 per cent during the rest of FY20 (November 2019 to March 2020) which looks unlikely.
The state budgets presented in respective state legislatures, like the Central government, have assumed 11 per cent nominal GDP growth in FY20. But nominal GDP growth in the first of FY20 was 7 per cent.
As the tax revenue growth moves in tandem with nominal GDP growth, state governments will face a significant shortfall in their tax collections from the budgeted level, said Ind-Ra.
According to the unaudited finances of 23 states, April to October fiscal deficit now stands at 49.6 per cent of the FY20 budgeted deficit. Based on the current tax growth, the overall shortfall in states' revenue could touch Rs 39,032 crore in FY20.
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