In a report, on Wednesday, rating agency ICRA sais that not paying the full GST (goods and service tax) compensations by the central government is among the factors which may result in up to Rs 3 lakh crore cut in capital expenditure by the states in the current financial year 2020-21.
The borrowing alternative offered by the Centre to make up for the shortfall in the promised compensation will lead to the states' fiscal deficits widening to 4.25-5.52 percent, the report said.
The compensation requirement of states for the year has been estimated at Rs 3 lakh crore, of which Rs 65,000 crore would be funded from the revenues garnered by the levy of cess, leaving a shortfall of Rs 2.35 lakh crore.
Last month, Finance Minister Nirmala Sitharaman said that the economy is facing an extraordinary 'Act of God' situation, which may result in economic contraction.
The GST Council, in its meeting on 27 August, pegged the gap between the GST compensation requirement of the state governments for FY21 and the expected GST cess collections at Rs 2.35 lakh crore, ICRA said.
The Centre had offered two options to the state governments for bridging this gap, which vary in terms of the amount that can be borrowed, the source of borrowing, rate of interest on borrowings, payment of interest, charge on cess collected after the five-year GST transition period ends in July 2022.
"We caution that the states may be forced to curtail their aggregate capital spending by as much as ₹1-3.4 lakh crore in FY21, on account of the anticipated shortfalls in GST compensation and Central tax devolution (CTD), despite the options for additional borrowings put forth by the GoI," the agency said.
It can be noted that capital expenditure is considered as the most productive of any government's expenses because of its ability to lead to what is called trickle-down benefits.
The agency estimated the Centre's shareable taxes at Rs 13.4 lakh crore in FY21, 30 percent lower than the budgeted amount of Rs 19.1 lakh crore. Given that 41 percent of shareable taxes to the state governments in FY21 are expected to be devolved, the CTD to the state governments will come at Rs 5.5 lakh crore.
It also estimates that Rs 48,400 crore of excess CTD was devolved to the states in FY20, which would need to be adjusted from the CTD for FY21.
"This would further reduce the estimated CTD in the current fiscal to ₹5.0 lakh crore, a substantial ₹2.8 lakh crore lower than the ₹7.8 trillion budgeted by the GoI," it said.
With inputs from PTI