ICRA projects the grants from the Centre to the states in FY2024 to decline sharply from the year ago
FinTech BizNews service
Mumbai, 23 October 2023: ICRA has projected the combined capital spending of a sample of 13 major state governments to display an impressive 29% expansion on a year-on-year (YoY) basis to Rs6.2 trillion in FY2024 from Rs4.8 trillion in FY2023 (according to the provisional actuals or PA), while modestly missing the FY2024 Budget Estimate (BE) of Rs6.7 trillion. With revenues likely to trail the budgeted targets, the revenue and fiscal deficits of the sample set are estimated at Rs2.1 trillion and Rs8.3 trillion, respectively, in FY2024, exceeding the budgeted of Rs1.4 trillion and Rs7.7 trillion, respectively. Moreover, the leverage (debt + guarantees) level of the sample states is estimated to rise to 30.0% of the Gross State Domestic Product (GSDP) in FY2024 from 28.9% of GSDP in FY2023.
Ms. Aditi Nayar, Chief Economist, Head Research & Outreach, ICRA said: “ICRA estimates that the sample of 13 major states has the fiscal space to support a robust 29% expansion in capital spending to Rs6.2 trillion in FY2024. This is in spite of a likely miss in sales tax collections and grants from the Centre, relative to the states’ FY2024 targets, adjustments related to off-budget borrowings, and the planned step-down in the base borrowing limit of the state governments to 3.0% of the GSDP in FY2024 from 3.5% of the GSDP in FY2023. The anticipated YoY surge in capex benefits from the prescient support extended by the Government of India (GoI) to the state governments through the increase in the allocation for the Scheme for Special Assistance to States for Capital Investments to Rs. 1.3 trillion in FY2024 BE from the Rs. 0.8 trillion loans disbursed to them in FY2023.”
ICRA projects several states in the sample to have adequate funds for completing 90-100% of their budgeted capex in FY2024, while a few states may have to compress their spending by a sizeable extent such as Punjab. Notably, some states’ net borrowing ceiling (NBC) for FY2024 would be adjusted by the GoI on account of the incremental off-budget borrowings, which they had raised in FY2022.
Revenues Expected To Trail The Budgeted Level
“With revenues expected to trail the budgeted level, ICRA estimates the combined revenue deficit of these 13 states at Rs2.1 trillion, higher than Rs. 1.4 trillion in FY2024 BE and nearly twice as high as the Rs1.1 trillion in FY2023 PA. Based on the projected capex of Rs6.2 trillion, ICRA estimates the sample states’ aggregate fiscal deficit for the current fiscal at Rs8.3 trillion, higher than the Rs. 7.7 trillion in FY2024 BE and Rs. 5.9 trillion in FY2023 PA. In a discomfiting trend, the combined leverage (debt+ guarantees) level of the sample is expected to increase to 30.0% of the GSDP in FY2024 from 28.9% of the GSDP in FY2023, with continuing variation across the states,” Ms. Nayar added.
The full impact of the cut in the excise duty on fuels by the GoI in May 2022 as well as the reduction in the VAT rates by several states in Nov 2021, which were subsequently not fully reinstated by most of the states will get reflected in the sales tax collections of FY2024. Despite the wearing-off of the base effect of the excise duty cut on fuels, ICRA expects the sales tax collections to record a three-year low YoY growth of sub-5% in FY2024. This is in divergence with ICRA’s expectations of a healthy 14-15% growth in the state GST and stamps and registration collections and around 11% growth in the excise duty collections of the states in FY2024.
Additionally, ICRA projects the grants from the Centre to the states in FY2024 to decline sharply from the year ago level, mainly on account of the discontinuation of the GST compensation grants and because of the tapering nature of the Finance Commission-recommended grants. Despite the end of the GST compensation period in June 2022, eight out of the 13 states in the sample set included such grants in their FY2024 BE, the full release of which appears unlikely. Moreover, some of the states in the sample expect the grants for various schemes in FY2024 BE to be as large as 2-6 times the amount received in FY2023. This is out of line with the trends in the YoY growth of such grants seen in recent fiscals. Therefore, ICRA estimates total grants to the 13 states at Rs. 3.2 trillion in FY2024, nearly two-thirds of the budgeted amount and the lowest since FY2020.
