States’ indebtedness to be high at 30-31% of their GDP in FY 2023: Report

The aggregate indebtedness of states – measured by debt to gross state domestic product (GSDP) – is expected to remain at 30-31% of their respective GDP this fiscal, almost at the same levels of FY’22 due to flattish growth in fuel tax and discontinuation of GST compensation according to ratings firm Crisil

Besides, sticky revenue expenditure and the need for higher capital outlays, along with modest revenue growth, will keep borrowings up this fiscal, Crisil said. But the Centre’s proposed special assistance of Rs 1 lakh crore to all states for capital spending will provide some respite.

Crisil’s study of the top 18 states which account for 90% of the aggregate GSDP- gross state domestic product, shows that states borrow mainly to fund deficits on the revenue account and incur capital outlays. The states include Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Andhra Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, Kerala, Haryana, Bihar, Punjab, Odisha, Chhattisgarh, Jharkhand and Goa “ Indebtedness had risen to a decadal high of 34% in fiscal 2021 (after remaining rangebound between 25-30% during fiscal 2016-2020) before cooling a tad to 31.5% in fiscal 2022” Crisil said.

States saw a small surplus on the revenue account in fiscal 2022, owing to a healthy revenue growth of 25% on-year supported by healthy GST collections, strong devolutions from the central government, recovery in sales tax collections from fuel and support from central government through GST compensation loans.

“Overall revenue of states is expected to rise 7-9% on-year in the current fiscal” said Anuj Sethi, senior director, Crisil Ratings. “Strong State Goods and Services Tax collections and healthy central tax devolutions will be the major drivers this fiscal as well. But flattish sales tax collections from fuel, modest growth in grants and discontinuation of GST compensation after end-June 2022 in line with the GST (Compensation to States) Act, 2017, will moderate the growth.”

On the other hand, revenue expenditure is set to rise by 11-12% on-year, similar to last fiscal, crisil said. This will be driven by higher committed expenditure (related to salaries, pension and interest costs), essential developmental expenditure (such as grants-in-aid, medical and labour welfare related expenses) and rising subsidies to power sector, which together contribute to 85-90% of the total revenue expenditure.

As a result, the revenue account of states will see a marginal weakening, to yield a revenue deficit of Rs 0.8 lakh crore (0.3% of GSDP) this fiscal. States will have to borrow to make up this shortfall.

In addition, states will need to borrow to fund outlays on key infrastructure segments such as roads, irrigation, rural development etc. While states had budgeted an ambitious 40% on-year capital outlay growth to Rs. 6.4 lakh crore this fiscal, CRISIL Ratings estimates capital outlay will rise ~15-17%, given the past track record.

However, assistance of Rs 1 lakh crore from the Central Government in the form of 50-year interest-free loans to states will help partially meet capital outlay target. Moreover, this loan is not counted towards the borrowing limit of 3.5% of GSDP for states this year.

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