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Challenges in controlling deficits at the state level will also impact fiscal consolidation efforts at the Centre which Moody’s projects will post a fiscal deficit of 3.7% of GDP instead of the 3.3% target set in the union budget.
“As slowing growth and continued infrastructure spending are likely to keep state-level deficits elevated, we expect the central government will continue to face challenges in achieving its fiscal consolidation targets,” said Gjorgji Josifov, an assistant vice-president and analyst at Moody’s.
Moody’s expects the debt burden of state governments to increase significantly from the Rs 7.5 lakh crore in loans budgeted for this fiscal, which itself represents an increase of 28% over total state borrowing in FY 2019, according to the report.
Josifov said that states were not able to generate enough revenues to cover their spending needs and the introduction of the GST had made them even more dependent on central government transfers.
The GST which replaced many indirect taxes has led to a decline in the proportion of revenue generated by states’ own taxes from 52% to 44% according to the report.
In particular states such as Bihar and the north-eastern states as well as the union territories of Jammu and Kashmir, which have less productive tax bases, are dependent on central transfer for the majority of their revenue, according to the report.
Moody’s projects that the state deficits for the fiscal will add up to around 3% of GDP bringing the general government deficit to 6.7% of GDP when coupled with the projected 3.7% deficit at the centre.
“Revenue continues to be insufficient to address state spending needs and as such, without policy changes, we expect deficits to persist around current levels at the state level, which will continue to challenge general government fiscal consolidation,” the report reads.
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