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States' fiscal deficit to narrow to 4.3% of GDP in FY22: Report

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The aggregate fiscal deficit of states is likely to be at 4.3 percent of the gross domestic product (GDP) in 2021-22 compared to 4.6 percent in 2020-21, says a report by India Ratings and Research.The rating agency has revised the outlook on state finances to stable for FY22 from stable-to-negative.

"We expect the aggregate fiscal deficit of states for FY22 to come in at 4.3 percent of the gross domestic product (GDP) compared to 4.6 percent (revised) in FY21,” the agency said in a report.It had earlier forecast FY21 fiscal deficit of states to be at 4.5 percent but revised it later due to a sharper-than-expected contraction of 6.1 percent y-o-y in the nominal GDP.

The agency estimates the nominal GDP to grow 14.5 percent in FY22, and believes a gradual pick-up in revenue collections could lead to an improvement in the capital expenditure from FY22.

The report said due to the economic downturn, even the union government finances are under pressure, leading to a lower-than-budgeted devolution of Rs 5.50 lakh crore to states in FY21 (revised estimate: RE) as against the budget estimate (BE) of Rs 8.03 lakh crore.

This is Rs 2.53 lakh crore lower-than-budgeted states’ share in central taxes and accounts for nearly 92 percent increase in fiscal deficit in FY21(forecast) over FY21 (BE).

The agency now estimates the aggregate revenue deficit to come in at 3.2 percent, higher than the earlier forecast of 2.8 percent of GDP in FY21.

The union government in its FY22 budget has committed to retaining the vertical share of states in central taxes at 41 percent, as per the recommendations of 15th Finance Commission (FC).

The Union Budget for FY22 has budgeted Rs 6.66 lakh crore for distribution out of the net proceeds of central taxes (FY21RE: Rs 5.50 lakh crore).

The agency said although it estimates the aggregate revenue receipt of the states to grow 8.4 percent y-o-y in FY22 from a decline of 0.6 percent in FY21 (f), the revenue deficit would persist in FY22.

It expects the aggregate revenue deficit of states to come in at 1.5 percent of GDP in FY22 as against FY21 (f) of 3.2 percent.

The pressure on the debt burden is likely to persist in FY22 due to a combination of revenue deficit, some pick-up in capex and repayment of past market borrowings, the agency said.

It estimates the states’ aggregate debt/GDP to rise to 33.9 percent in FY22 from 32.8 percent in FY21 (f).States’ fiscal deficit is now financed mainly through market borrowings and the report estimates the gross market borrowings of states will increase to Rs 8.38 lakh crore in FY22 from Rs 8.2 lakh crore in FY21 (f).

The net market borrowings would be Rs 6.4 lakh crore in FY22