States’ Debt To Remain Elevated At 31-32% In FY24: CRISIL

The states are expected to witness elevated debt amid higher capital outlays and moderate revenue growth in FY24, with overall borrowings to potentially rise by 9 per cent to touch Rs 87 lakh crore. 

The states’ debt is set to remain on the higher end at 31-32 per cent of their GDP, a CRISIL Ratings report revealed. The report noted that the states are expected to witness elevated debt amid higher capital outlays and moderate revenue growth in the current fiscal year, with the overall borrowings to potentially increase by 9 per cent to touch Rs 87 lakh crore. 

Notably, the indebtedness of a state is calculated as the ratio of its debt to the gross state domestic product (GSDP). Prior to the pandemic, the debt-GSDP ratio stood at 28-29. However, the aggregate gross fiscal deficit (GFD) as a ratio of GSDP is projected to remain at 2.5, below the mandated level of 3 under the Fiscal Responsibility and Budget Management Act, the ratings agency noted, as reported by PTI. 

CRISIL further stated in its report that with revenue growth below expected levels, the states would be forced to borrow more to increase their capital outlays, in addition to catering to the high end revenue expenditure related to salaries, pensions, and interest costs. The agency noted that this along with the single-digit growth in revenue would maintain the debt level at the higher levels at 31-32 per cent of their GDP.

Notably, the report comprises of numbers available from the top states, contributing to 90 per cent of the overall GSDP, such as Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, Bengal, Madhya Pradesh, Andhra Pradesh, Kerala, Odisha, Punjab, Bihar, Chhattisgarh, Haryana, Jharkhand and Goa. 

Further, the states have deepened their fiscal deficit in 2023 as overall revenue increased at a moderate 8 per cent, while revenue expenditure increased at a swift pace at 11 per cent on a year-on-year (YoY) basis. The agency noted that in the current fiscal year, the overall revenue is estimated to increase 6-8 per cent, helped by collections from the goods and services tax, devolutions from the Centre, and taxes and duties on liquor. 

At the same time, revenue expenditure during FY24 is projected to boost 8-10 per cent, helped by elevated committed expenditure, and enhanced social welfare and public health-related expenses which together stood at about 65 per cent of the overall revenue expenditure of the states.

Anuj Sethi, a senior director at the agency, noted, “The revenue deficit will inch up to 0.5 per cent of GSDP this fiscal from 0.3 per cent last fiscal. This, coupled with the 18-20 per cent on-year increase in capital outlays or 2.3 per cent of GSDP on key infrastructure segments such as water supply and sanitation, urban development, roads, and irrigation, will necessitate higher borrowings this fiscal too. However, the 50-year interest-free loans worth Rs 1.3 lakh crore from the Centre to the states will help meet part of the capital outlay and catalyse investments. This loan is not included in the borrowing limit of 3 per cent of GSDP for states this fiscal.”

Another director with the agency, Aditya Jhaver, added, “Overall balance sheet borrowings of the states and off-budget debt funding like guarantees to the power sector and irrigation entities, are likely to go up by Rs 7.5 lakh crore this fiscal and cross Rs 87 lakh crore, keeping states' indebtedness high at 31-32 per cent, similar to fiscal 2023. Already, borrowings through state development loans, which comprise 65 per cent of their overall borrowings, rose 28 per cent on-year between April and November 2023.”

Jhaver stated that any weakening in economic activity could possibly hurt GDP growth and pose downside risks. However, a better-than-expected tax buoyancy or support from the Centre in the form of higher grants could possibly give some liquidity buffer to states.