State governments will probably face challenges in decreasing deficits as economic growth lags and infrastructure spending resumes, says a statement from credit-rating firm Moody.
Earlier, the Reserve Bank of India data revealed that the fiscal deficit of states expanded to 2.9% of GDP in their Amended Estimates, from 2.6% in their Budget Estimates for FY19. On the other hand, the capital expense was lower than planned, but it kept a strong trend. The rating agency affirmed that reaching the N K Singh panel’s suggested level of aggregate debt load at 20% of GDP by 2022-23 by states will be a hurdle in an economic situation marked by slow growth and a weak market.
Owing to the steady revenue situation and the burden on the treasury emanating from power utilities and farm sector support, states are being forced to borrow more. The RBI research reveals that the aggregate debt level could reach beyond 25% of GDP in the current year itself if off-budget guarantees are carried into account. Remark that the debt level rose after 2016-17 because of UDAY.
This has put restrictions on development-related spending, as interest subsidies and other mandatory spending is set to increase faster than capital investment this year. Higher debt levels are linked with weaker economic growth, the study explains.
To make the debt sustainable, revenues require to increase at 14% per year, higher than what the last three years have reached. Though updated estimates for 2018-19 record higher growth, provisional actuals exhibit a drop. Higher budgeted growth in 2019-20 has been dwindled by near-stagnation in the fiscal year to date. The debt claim is increasingly being fed to by the market.
The GST which replaced several indirect taxes has headed to a decline in the proportion of revenue made by states’ taxes from 52% to 44%, according to the report.