In addition, revenue spending stickiness and the need for higher capital spending, along with modest revenue growth, will keep borrowing higher this fiscal year, Crisil said. But the special aid offered by the Center of Rs 1 lakh crore to all states for capital expenditure will provide respite.
Crisil’s study of the top 18 states that account for 90% of the GSDP’s overall gross domestic product shows that states borrow primarily to fund revenue account deficits and incur capital expenditures. States include Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Andhra Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, Kerala, Haryana, Bihar, Punjab, Odisha, Chhattisgarh, Jharkhand and Goa. a high of 34% in fiscal year 2021 (after remaining in a range between 25-30% in fiscal year 2016-2020) before declining slightly to 31.5% in fiscal year 2022,” Crisil said.
States ran a small surplus on the revenue account in fiscal year 2022, due to healthy revenue growth of 25% year-on-year, supported by healthy GST collections, strong central government decentralizations , a resumption of fuel sales tax collections and central government support through GST offset loans.
“Overall state revenue is expected to grow 7-9% year-over-year in the current fiscal year,” said Anuj Sethi, senior director of Crisil Ratings. “Strong State Goods and Services Tax collections and sound central fiscal decentralizations will also be key drivers in this exercise. But low fuel sales tax collection, modest subsidy growth, and the discontinuation of GST compensation after the end of June 2022 under the GST (States Compensation) Act 2017 will moderate growth. .
On the other hand, revenue spending is expected to grow 11-12% year-over-year, similar to last fiscal year, Crisil said. This will be driven by higher committed expenditures (related to salaries, pensions and interest charges), essential development expenditures (such as grants, medical expenditures and social protection expenditures) and the increased subsidies to the electricity sector, which together contribute 85-90% of total revenue expenditure.
As a result, the States Revenue Account will see a marginal weakening, to generate a revenue shortfall of Rs 0.8 lakh crore (0.3% of GSDP) this financial year. States will have to borrow to make up for this shortfall.
In addition, states will need to borrow to finance spending on key infrastructure segments such as roads, irrigation, rural development, etc. 6.4 lakh crore this financial year, CRISIL Ratings estimates that capital expenditure will increase by around 15-17%, based on past track record.
However, aid of Rs 1 lakh crore from the central government in the form of 50-year interest-free loans to the states will partially help meet the capital expenditure target. Additionally, this loan does not count against the GSDP’s 3.5% borrowing limit for states this year.