States Fiscal Deficit Will Zoom to 4.5% of GDP; Revenue Gap Seen to Soar 7-Fold to 2.8%: Report

Mumbai: Led by a massive spike in revenue deficit of 2.8% of GDP, the aggregate fiscal deficit of the states will rise to 4.5% of gross domestic product or GDP in 2020-21 at Rs 8.5 lakh crore, against the earlier forecast of 3% of GDP, says a report by India Ratings.

As the nine-week long national lockdown to contain the spread of the coronavirus pandemic crippled the economy, the Centre has allowed the states to borrow 200 bps (basis points) more than the legally mandated 3% deficit while the Centre itself has upped its borrowing targets by Rs 4.2 lakh crore.

But most states are not eligible to draw down the full 5% as the incremental borrowing comes with lots of caveats.

The novel coronavirus pandemic has hit the economy at a time when it was already on a downhill drive for the almost two years now and the nine-week long lockdown has completely stalled more than 80% of the economy.

According to a report by domestic rating agency India Ratings on Tuesday, the combined gross and net market borrowings of the states will be 4.5% of GDP and 3.3% of GDP, respectively, in the current fiscal (FY21).

States' borrowing ceiling is Rs 6.4 lakh crore based on 3% of GSDP(gross state domestic product) for FY21 and the enhanced limit would enable them to borrow an additional Rs 4.28 lakh crore or 5% in FY21.

But of this, only 0.5% is immediate and without conditions as the remaining 150 bps more borrowing is linked to states' performance on milestone-based achievement in at least three out of four reform areas outlined by the Centre—reforms in ration cards (one-nation-one-card), power distribution, ease of doing business among others.

The agency has also revised budget estimates for FY20 and FY21 of 20 states, finalised before the lockdown, the nominal GSDP growth projected for FY20 by these states is mostly upwards of an aggressive 10%.

"The fallout of the pandemic will be severe on the economy. The extended nation-wide lockdown will exacerbate the economic downturn as our estimate pegs the nominal GDP growth at 0.9 per cent for FY21,” says the report.

States are already facing a lower-than-budgeted share in Central taxes and subdued revenue growth since the 21-day sudden countrywide lockdown was imposed from March 25.

These 20 states constitute nearly 86% of the budgeted aggregate revenue receipts for FY20, which stood at 4.2% lower than budgeted Rs 24.79 lakh crore, primarily led by a 16.2% reduction in the devolution of Central taxes.

States, in all likelihood, will face significant slippages from the FY21. The extent of slippage will vary depending on the pace at which economic activity limps back to normalcy.

Despite the lockdown relaxations since mid-May, the revenue balance of the states in FY21 is set to worsen, particularly for those which already run sizeable revenue deficit and the states are set to see revenue deficit of 2.8% of GDP than the earlier forecast of 0.4%.

Accordingly, the agency has revised upward its estimate of gross market borrowings of the states to Rs 8.25 lakh crore in FY21 from its earlier estimate of Rs 6.09 lakh crore, as the states are expected to resort to higher market borrowings to fund fiscal deficit.