Based on the study of states’ budget for the year to March 2021, India’s provinces have budgeted a combined gross fiscal deficit of 2.8% of gross domestic product. While that is lower than the 3.2% seen in the year to March 2020 and the 3% cap set by the law, the RBI
sees the estimates being breached substantially given the fallout of the pandemic.
The virus is “likely to undermine fiscal targets and associated receipts for 2020-21,” the central bank said. “The consequent rising levels of debt and guarantees pose risks to state finances, going forward.”
The maturity profile of states’ debt suggest that redemption pressure is likely to double from 2026 onwards. It implies borrowings by provinces might soar in the coming years and could lead to crowding out of the private sector in a market already cramped by issuances by the federal government and state-run enterprises.
Economists estimate the combined fiscal gap of states and the federal government will blow out to double digits. A Bloomberg survey of economists shows the federal government’s budget gap will probably widen to 8% of GDP, compared with the government’s target of 3.5%.
Earlier this year, the RBI
increased the ways and means advance facility for states to overcome the crisis they faced due to the virus. It also made relaxations on their overdraft facilities, both of which were extended until the end of the financial year on March 31.