ICRA expects the share of market borrowings in funding the states’ deficit to continue its declining trend in FY2024, and estimates that 75 per cent of the target fiscal deficit would be funded by net market borrowings, implying net issuances of Rs 6.7 lakh crore.
The rating agency’s estimate is lower than the Budget Estimate/ BE of 79 per cent in FY2024.
The share of market borrowings in funding the states’ deficit declined from a peak 96 per cent in FY2020, to 84 per cent in FY2021, and to below 80 per cent in FY2022 and FY2023 (based on the Revised Estimates or RE), and has been partly offset by an increase in loans from the Centre, ICRA said in an analysis of state government finances.
Also read: Editorial: States’ fiscal deficit is in check, but concerns remain
Loans from Centre
Loans from the Centre were dominated by the Goods and Services Tax (GST) compensation loans in FY2021 and FY2022.
In FY2023 RE and in FY2024 BE, a sizeable portion of the loans from the Centre was made up of interest-free capex loans from the Government of India (GoI) to the states, ICRA said.
Such loans are expected to fund more than 10 per cent of the states’ fiscal deficit in both these years, according to the analysis.
Also read: Leave States to fix their own fisc
Borrowing limit
ICRA assessed that the base borrowing limit of state governments varied between 3-4 per cent of Gross State Domestic Product (GSDP) during FY2018-2024, with additional borrowing of 0.5-1 per cent of GSDP linked to the prescribed targets/ reforms.
Also read: Fiscal Deficit for April-January reached 68% of revised estimate
The annual borrowing permitted to the state governments acts as a soft constraint to the size of the fiscal deficit that they can incur, the agency said.
On an aggregate basis, the fiscal deficit of the sample (24) states was within the borrowing target in recent years, even as several states breached the target, according to Aditi Nayar, Chief Economist & Head – Research & Outreach; Neetika Shridhar, Assistant Vice-President; and Jaspreet Kaur, Analyst.
This could be on account of revisions in the GSDP as well as higher borrowing through funds in the Public Account, according to the ICRA economic research team.
The public account funded 2-20 per cent of the fiscal deficit of the states during FY2018-FY2023 RE, displaying a wide variation.
With no prescribed legislative approval for withdrawing money from the public account, it may continue to be a volatile source of funding the fiscal deficit of the state governments in the near to medium term, ICRA said