‘States deficit seen hitting 4.7% peak’

The combined fiscal deficit of the states will hit a peak of ₹8.7 lakh crore or 4.7% of their GDP this fiscal on the back of steep fall in tax collections due to disruptions inflicted by the pandemic, according to a report.

Revenue of the states have so badly fallen that as much as 70% of the fiscal deficit is contributed by revenue deficit, which used to be around 15%, a Crisil study said on Wednesday. Economic activity slumped from late March last when the country was brought under a lockdown, and subsequently improved as the restrictions were eased.

While the first quarter saw the economy tanking by a historic -23.9%, by the second quarter the contraction narrowed to 7.5% and analysts are expecting Q3 and Q4 to print in the green.

The pandemic has hit tax collections of the states and resulted in a near four-fold spike in their revenue deficits this fiscal over FY20, the report said.

This will not only expand states’ aggregate gross fiscal deficit to an all-time high of ₹8.7 lakh crore, or 4.7% of their gross state domestic product or GSDP but also skew its composition towards revenue deficit which is relatively less value-accretive towards future tax potential, it added.

Though tax collection may slowly recover with improving economic outlook, higher interest burden, because of the high debt funding of this year’s gross fiscal deficit, coupled with sticky revenue expenditure, may keep revenue deficit high for the states and the deficit composition skewed over the next twothree years, the report said, adding that this will, in turn, increase their credit risk.

This fiscal, revenue deficit would contribute around 70% of fiscal deficit, sharply higher than the average 15% seen over the last five fiscals, because of a 15% on-year decline in revenue this fiscal, the report said.