The aggregate indebtedness of states – measured by debt¹ to gross state domestic product (GSDP) – is expected to remain elevated at ~33% this fiscal, despite the post-pandemic recovery bolstering the shrinking revenue graph.

The ratio had risen to a decadal high of 34% last fiscal. Sticky and elevated revenue expenditure and the need for higher capital outlay will keep borrowings up this fiscal.

That said, the Centre’s decision to provide Goods and Services Tax (GST) compensation loans for the second straight year at a higher quantum of ~Rs 1.4 lakh crore (Rs 0.9 lakh crore in fiscal 2021) will provide some respite.²

CRISIL’s study of the top 18 states³, which account for 90% of the aggregate GSDP, indicates as much. States primarily borrow to fund deficits in the revenue account and incur capital outlays. While, the revenue deficits for states expanded in fiscal 21 owing to the elevated revenue expenditures amidst constrained revenues, capital outlays were stagnant to manage the borrowing levels.

Says Ankit Hakhu, Director, CRISIL Ratings, “Overall revenue of states is expected to rise ~15% on-year in fiscal 2022, following ~3% decline last fiscal. As the economy recovers, two major components of revenue – collections from GST and sales tax from petroleum products – comprising ~30% of states’ revenue is likely to rebound strongly. The former could grow ~20% supported by higher inflation and better compliance levels, while the latter, by ~25%, given volume recovery and higher crude oil prices.”

However, a 10-11% on-year rise in revenue expenditure will negate the higher inflows. This will be driven by higher committed expenditure (related to salaries, pension and interest costs) and essential developmental expenditure (such as grants-in-aid, medical and labour welfare related expenses) that cumulatively contribute to 75-80% of the total revenue expenditure.

Consequently, improvement in the revenue account will remain modest, with revenue deficit reducing from Rs 3.8 lakh crore (or 2% of GSDP) last fiscal to Rs 3.4 lakh crore (1.6% of GSDP) this fiscal. States will have to borrow to make up this shortfall.

What will add to the borrowing requirement are state outlays in key infrastructure segments like roads, irrigation, rural development etc. This is necessitated to improve future tax potential and states are likely to put the foot on the pedal. However, while the states had budgeted a ~55% on-year growth in the capital outlays to ~ Rs. 5.6 lakh crore in fiscal 2022, we estimate the growth will moderate to ~20% given the past track record and already elevated fiscal deficit levels of close to 4%, well above the historical levels.

Nevertheless, the GST compensation loans of Rs 1.4 lakh crore this fiscal may ease some pressure off the states. Moreover, this loan is not counted towards the borrowing limit of 4% of GSDP, available with states for fiscal 2022. The servicing of these loans is to be funded by the Centre through future GST cess collections.

Says Aditya Jhaver, Director, CRISIL Ratings, “Consequently, overall debt of states, including guarantees, is likely to increase by ~Rs 7.2 lakh crore this year to ~Rs 71.4 lakh crore by end-fiscal. This will keep states’ indebtedness at an elevated level of 33%, only a notch lower than the decadal high of 34% seen last fiscal.”

The math assumes strong economic recovery with ~15% growth in nominal GSDP this fiscal. A higher than expected intensity of the third wave leading to a re-imposition of stringent lockdowns could negatively impact economic growth and our estimates.

¹ Debt includes market borrowings, loans from Centre (excluding GST compensation loans), public debt and guarantees
² The support pertains to the analysed states; the Centre paid Rs 2.7 lakh crore in total to all states
³ States analysed: Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Andhra Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, Kerala, Haryana, Bihar, Punjab, Odisha, Chhattisgarh, Jharkhand and Goa