States' fiscal deficit to narrow to 4.3% of GDP in FY22

Mumbai: The aggregate fiscal deficit of states is likely to be at 4.3 per cent of the gross domestic product (GDP) in 2021-22 compared to 4.6 per cent in 2020-21, says a report by India Ratings and Research.

The rating agency has revised the outlook on state finances to stable for FY22 from stable-to-negative. "We expect the aggregate fiscal deficit of states for FY22 to come in at 4.3 per cent of the gross domestic product (GDP) compared to 4.6 per cent (revised) in FY21," the agency said in a report. It had earlier forecast FY21 fiscal deficit of states to be at 4.5 per cent but revised it later due to a sharper-than-expected contraction of 6.1 per cent y-o-y in the nominal GDP. The agency estimates the nominal GDP to grow 14.5 per cent in FY22, and believes a gradual pick-up in revenue collections could lead to an improvement in the capital expenditure from FY22. The report said due to the economic downturn, even the union government finances are under pressure, leading to a lower-than-budgeted devolution of Rs 5.50 lakh crore to states in FY21 (revised estimate: RE) as against the budget estimate (BE) of Rs 8.03 lakh crore.

This is Rs 2.53 lakh crore lower-than-budgeted states' share in central taxes and accounts for nearly 92 per cent increase in fiscal deficit in FY21(forecast) over FY21 (BE). The agency now estimates the aggregate revenue deficit to come in at 3.2 per cent, higher than the earlier forecast of 2.8 per cent of GDP in FY21. The union government in its FY22 budget has committed to retaining the vertical share of states in central taxes at 41 per cent, as per the recommendations of 15th Finance Commission (FC).