The Covid pandemic-induced lockdown and consequent slump in economic activity will hit tax collections of states and result in a near four-fold expansion in their revenue deficits this fiscal, year-on-year, ratings agency Crisil said in a report.
With this, the states’ aggregate gross fiscal deficit (GFD) will not only get expanded to an all-time high of Rs 8.7 trillion, or 4.7 per cent of GSDP, but also skew its composition towards revenue deficit which is relatively less value-accretive towards future tax potential, the report said.
Though tax collections are expected to improve slowly with improving economic outlook, higher interest burden because of high debt funding of this year’s GFD, coupled with sticky revenue expenditures, may keep revenue deficits high for states and GFD composition skewed over the next 2-3 years. This will, in turn, increase the credit risk for states.
It may be noted that the Centre had already given extra leeway to states this year to borrow to meet all expenditure requirements. An additional borrowing limit of 2 per cent over and above 3 per cent of gross state domestic product (GSDP) already allowed had been provided to