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Fiscal deficit of states may hit Rs 8.7 lakh cr
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SME Times News Bureau | 20 Jan, 2021
The Covid pandemic-induced lockdown and consequent slump in economic
activity will hit tax collections of states and result in a near
four-fold expansion in their revenue deficits this fiscal, year-on-year,
ratings agency Crisil said in a report.
With this, the states'
aggregate gross fiscal deficit (GFD) will not only get expanded to an
all-time high of Rs 8.7 lakh crore, or 4.7 per cent of GSDP, but also
skew its composition towards revenue deficit which is relatively less
value-accretive towards future tax potential, the report said.
Though
tax collections are expected to improve slowly with improving economic
outlook, higher interest burden because of high debt funding of this
year's GFD, coupled with sticky revenue expenditures, may keep revenue
deficits high for states and GFD composition skewed over the next 2-3
years. This will, in turn, increase the credit risk for states.
It
may be noted that the Centre had already given extra leeway to states
this year to borrow to meet all expenditure requirements. An additional
borrowing limit of 2 per cent over and above 3 per cent of gross state
domestic product (GSDP) already allowed had been provided to states.
This has already pushed up debt burden on states.
A CRISIL
Ratings study of 18 states, which account for 90 per cent of aggregate
gross state domestic product (GSDP), indicates as much.
Says
Manish Gupta, Senior Director, CRISIL Ratings Ltd, "Composition of GFD,
apart from its level, is one of the critical indicators of credit
quality of states. Higher contribution of capital expenditure (capex) in
a state's GFD composition is viewed positively as it supports capital
formation, which improves the state's tax potential. In this fiscal,
revenue deficit of states would contribute 70 per cent of GFD, sharply
higher than the average 15 per cent seen over the past five fiscals."
That
is because of 15 per cent year-on-year decline in revenue this fiscal.
Revenue expenditures may also remain sticky as these are either
committed (related to salaries, pension and interest costs), making it
difficult to cut, or have been necessitated by the pandemic (such as
grants-in-aid, medical and labour welfare related expenses). High
revenue deficit will also compel states to moderate their capex to
remain within fiscal borrowing limits, thereby aggravating the GFD skew.
To
fund this expanded and skewed GFD, states are likely to borrow more
this year. This will increase their indebtedness, but not contribute
much towards future tax potential. We expect revenue collections to - at
best - reach close to pre-pandemic levels next fiscal, factoring in
unlocking that began in July 2020 and our forecast of real GDP growth of
10 per cent for India next fiscal, the report said.
Ankit Hakhu,
Director, CRISIL Ratings Ltd, said "The rising interest obligations due
to higher indebtedness coupled with modest revenue collections will
weaken interest cover of the states to 5-6 times over the medium term
from 7.7 times in fiscal 2020. Further, while states' capex is expected
to rise next year within the available fiscal space, its impact on tax
potential will only be visible in subsequent years."
Meanwhile,
high and sticky revenue expenditures will continue to skew the GFD
composition, with revenue deficit contributing to 30-40 per cent of GFD
over next few years, higher that the average of fiscals 2016-20. This
skewed GFD composition, along with weak interest cover, will constrain
the credit outlook for the states.
A strong and sustained revival
in tax collections going forward and ability of states to step up capex
to rebalance the composition of GFD will remain key monitorables.
GFD is primarily composed of capex, net lending and revenue deficit.
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
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64.50 |
UK Pound
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87.50
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84.65 |
Euro
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78.25
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75.65 |
Japanese
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56.85 |
As on 13 Aug, 2022 |
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