The aggregate indebtedness of states – measured by debt¹ to gross state domestic product (GSDP) – is expected to remain elevated at 30-31% this fiscal, almost similar to ~31.5% seen in fiscal 2022.

Sticky revenue expenditure and the need for higher capital outlays, along with modest revenue growth, will keep borrowings up this fiscal.

That said, the Centre’s announcement last budget to provide special assistance of ~ Rs 1 lakh crore to all states for capital spending will provide some respite.²

CRISIL’s study of the top 18 states³, which account for 90% of the aggregate GSDP, shows that states borrow mainly to fund deficits on the revenue account and incur capital outlays. 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.

In fact, 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.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “Overall revenue of states is expected to rise ~7-9% on-year in the current fiscal. 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 compensation⁴, 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. 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.

Consequently, 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.

Nevertheless, 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.⁵

Says Aditya Jhaver, Director, CRISIL Ratings, “Consequently, overall balance sheet borrowings of states and off-budget borrowings like guarantees to power sector, irrigation entities etc are likely to increase by ~Rs 6.5 lakh crore to ~Rs 66.5 lakh crore by end-fiscal. This will keep states’ indebtedness at 30-31% for the current fiscal, despite benefitting from the strong nominal GSDP growth expectations in the current fiscal.”

Any slowdown in economic activity could negatively impact GSDP growth and our estimates. On the other hand, better-than-expected tax buoyancy or any extension in GST compensation payments could provide further liquidity buffer to states.

¹ Debt includes market borrowings, loans from Centre (excluding GST compensation loans), public debt and guarantees
² The support pertains to all the states; for analysed states, it is estimated at ~ Rs 0.8 lakh crore
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
⁴ In fiscal 2022, the states analysed received GST cess payments of Rs 0.8 lakh crore and GST compensation loans of Rs 1.3 lakh crore
⁵ The loan is not included in indebtedness calculation for states