Modest revenue growth, higher capital outlays to keep States’ debt high at 30-31% this fiscal: Report

States’ debt will stay elevated at 30-31% of their gross domestic products this fiscal as they have been borrowing from the markets much beyond their means amid modest revenue growth, a report said on Thursday.

The aggregate indebtedness of States, as measured by debt to gross state domestic product (GSDP), is expected to remain elevated at 30-31% this fiscal, almost similar to 31.5% seen in fiscal 2021-22, Crisil said in a report.

States’ indebtedness had risen to a decadal high of 34% in the Covid-hit fiscal 2020-21, after remaining range-bound between 25 and 30% during fiscals 2016-20 before cooling a tad to 31.5% in fiscal 2022, the agency said.

Sticky revenue expenditure and the need for higher capital outlays along with modest revenue growth will keep borrowings up this fiscal, it added, but pointed out that states may get some respite from the Centre’s decision to provide ₹1 lakh crore special assistance to them for capital spending on infrastructure and discom reforms.

Crisil said the assessment is based on its study 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% of the aggregate GSDP.

The study shows that states borrow mainly 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% 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 the agency, the overall revenue of states is expected to rise 7-9% 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.

On the other hand, similar to last fiscal, revenue expenditure, which account for 85-90% of total revenue spends, is set to rise by 11-12%, driven by higher committed expenditure by way of salaries, pensions and debt servicing, essential developmental expenditure such as grants-in-aid, medical and labour welfare expenses, and rising subsidies to the power sector.

Consequently, the revenue account will see a marginal weakening and will collectively see a deficit of ₹0.8 lakh crore (0.3% of GSDP) this fiscal. In addition, states will need to borrow to fund roads, irrigation, rural development etc.

States have budgeted an ambitious 40% capital outlay growth to ₹6.4 lakh crore this fiscal, but the agency sees capital outlays rising by only 15-17%, given their past track record. Nevertheless, the ₹1 lakh-crore central assistance in the form of 50-year interest-free loans to states will help partially meet capital outlay targets. Also, this loan is not counted towards the borrowing limit of 3.5% 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 ₹6.5 lakh crore to ₹66.5 lakh crore this fiscal, which will leave their indebtedness elevated at 30-31% despite benefitting from the strong nominal GSDP growth expectations this fiscal.