FY21 deficit of States seen from 4.25 to 5.52% of GSDP

State governments’ deficit is seen in the range from 4.25 per cent up to 5.52 per cent of the gross state domestic
FY21 deficit of States seen from 4.25 to 5.52% of GSDP
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NEW DELHI: State governments' deficit is seen in the range from 4.25 per cent up to 5.52 per cent of the gross state domestic product (GSDP) in the current fiscal, ICRA estimates showed on Wednesday.

The estimates have been derived from an analysis of the two options for state government borrowing in FY2021 put forth recently by the Centre.

"The borrowing limit set by the GoI acts as a soft constraint to the size of the states' fiscal deficits," said Jayanta Roy, Group Head - Corporate Sector Rating, ICRA, in a statement.

"We caution that the states may be forced to curtail their aggregate capital spending by as much as Rs 1 trillion to Rs 3.4 trillion in FY2021, on account of the anticipated shortfalls in GST compensation and Central tax devolution (CTD), despite the options for additional borrowings put forth by the GoI."

Last month, during the GST Council meet, the Union Finance Ministry pegged the gap between the compensation requirement of the state governments for FY 2021 and the expected cess collections at Rs 2.35 trillion.

Accordingly, the Centre offered two options to the state governments for bridging this gap of Rs 2.35 trillion, which vary in terms of the amount that can be borrowed, the source of borrowing, rate of interest on borrowings, payment of interest, charge on cess collected after the five-year GST transition period ends in July 2022.

Moreover, ICRA forecasts the Centre's shareable taxes at Rs 13.4 trillion in FY2021, 30 per cent lower than the budgeted amount of Rs 19.1 trill ion.

"Based on the Fifteenth Finance Commission's recommendation, the GoI is expected to devolve 41 per cent of its shareable taxes to the state governments in FY2021. ICRA therefore projects the CTD to the state governments at Rs 5.5 trillion in FY2021," the statement said.

"ICRA also estimates that Rs 484 billion of excess CTD was devolved to the states is FY2020, which would need to be adjusted from the CTD for FY2 021. This would further reduce the estimated CTD in the current fiscal to Rs 5 trillion (Rs 5.5 trillion less Rs 484 billion), a substantial Rs 2.8 trillion lower than the Rs 7.8 trillion budgeted by the GoI."

According to the statement, based on the minimum borrowing of 4.25 per cent of GSDP under 'Option II', the additional 1.25 per cent of GSDP Rs 2.35 trillion, is by design adequate to cover the shortfall in the GST compensation for FY2021 as estimated by the GoI.

However, there will be a shortfall of Rs 3.4 trillion based on ICRA's projection of the shortfalls in GST compensation and CTD for FY2021. The additional maximum borrowing of 2.52 per cent of GSDP under 'Option I', if the states meet all the prescribed reforms within the set timeline, would be inadequate to cover the shortfalls in GST compensation and CTD for FY2021 based on ICRA's projections, by around Rs 1 trillion.

"Loss of revenues other than GST compensation and CTD, as well as higher revenue expenditures on the aforesaid activities, could result in an even sharper contraction in the state governments' ability to undertake capital expenditure in FY2021, as compared to our assessed range of Rs 1 trillion to 3.4 trillion," Roy added. (IANS)

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