FY23 Outlook: States’ Deficit Quality Likely to Improve; Ind-Ra

India Ratings and Research (Ind-Ra) has revised the outlook on the finances of Indian states to improving for FY23 from neutral. The agency expects the aggregate fiscal deficit of states for FY23 to come in at 3.6% of the gross domestic product (GDP) compared to 3.5% (revised) in FY22 (forecast; f).

The agency's earlier forecast for FY22 was 4.1%. The revision was made due to better-than-expected growth in revenue receipts and higher growth in the nominal GDP in FY22. Ind-Ra estimates India's nominal GDP to grow 17.6% yoy, higher than its 19 August 2021 estimate of 15.6% in FY22.

The quality of the fiscal deficit (revenue deficit as a percentage of fiscal deficit) is likely to improve in FY22 (f) and FY23 (f), after deteriorating during FY20 and FY21(RE) due to the impact of COVID-19 on the states' revenue receipts. The Comptroller and Auditor General provides information on the monthly unaudited finances of state governments. Ind-Ra has analysed information on the 26 states for April to November FY22. The aggregate revenue receipts of the 26 states grew 25.1% yoy to Rs 16.4 trillion during April-November FY22.

Revenue expenditure of the 26 states grew 12% yoy during April-November FY22. Against the FY22BE of Rs 6.65 trillion, the union government has allocated a higher amount of Rs 7.45 trillion as the states' share in central taxes in FY22RE. An economic recovery led pick-up in own-revenue collection, combined with higher than budgeted tax devolution from the centre, would moderate states' aggregate revenue deficit to 0.73% of GDP (previous estimate: 1.3%) in FY22. Ind-Ra has projected a marginally lower aggregate revenue deficit of 0.69% of GDP for FY23.

Even with a continuing revenue deficit, the states have greater leg-room to undertake higher capital expenditure in FY23 due to the INR1 trillion financial assistance by way of the 50-year interest-free loans extended by the union government in its FY23 budget. The agency expects capex to GDP ratio to be higher at 3.04% in FY23(f) than 2.84% in FY22 (f). The fiscal deficit, therefore, would be largely channelised towards the development of state infrastructure in FY23, believes Ind-Ra.