The agency estimates the consolidated fiscal deficit of states to increase to 2.3% of GDP in FY14 as against the budget estimate of 2.2%. However, this would not affect the consolidated credit profile of states. Ind-Ra expects GDP growth in FY15 to increase to 5.6%, leading to an improvement in the aggregate fiscal positions of states. However, fiscal performance of individual states would vary.
Value added tax (VAT) on petroleum products could pose a concentration risk for the consolidated state finances if crude oil prices decline, though this presently looks difficult. The petroleum sector contributed nearly 30% (up 14.4% yoy) to the VAT collection of states in FY13.
Aggregate debt of states as a percentage of GDP is likely to increase to 21.7% in FY14 from the budgeted estimate of 21.5%. Despite this slippage, debt will be sustainable as Ind-Ra believes nominal growth of economy in excess of interest rate on debt will continue to support the agency's debt sustainability expectations. Nevertheless, indirect risk (guarantee, and deficit and debt of state public sector undertakings) could impact the credit profile of some states.
Ind-Ra expects the liquidity of state governments to remain comfortable in FY15. Even in FY14, most states did not face difficulty due to a surge in investment in national small savings fund. Also, there was an increase in the investment of state government's surplus cash in 14 days intermediate treasury bills and auction treasury bills during FY14 and lower utilisation of ways and means advances from the Reserve Bank of India.
A fiscal profligacy in the run-up to the forthcoming general election and prolonged growth slowdown could lead to the outlook being revised to negative. However, Ind-Ra attaches a low probability to both these events.
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