Economy

States’ deficit poses a challenge to India’s fiscal consolidation target, says Moody’s

Updated : November 27, 2019 01:32 PM IST

States’ reliance on central government grants has increased since GST implementation

Slowing growth and infrastructure spending needs will keep deficits and borrowing elevated.

Insufficient state government revenues will continue to challenge India's ability to meet medium-term fiscal consolidation goals amid slowing economic growth, Moody’s Investors Service said in a report.

According to the global rating agency, state governments’ fiscal deficit will persist as revenue continues to be insufficient to address state spending needs, thus, challenging general government fiscal consolidation.

“Indian states do not generate sufficient own-source revenue to cover their spending needs, and the introduction of the goods and services tax (GST) earlier in 2017 has further increased states’ reliance on central government transfers,” said Gjorgji Josifov, a Moody’s Assistant Vice President and Analyst.

Meanwhile, Moody’s expects persistent spending pressures and slower economic growth will result in continued fiscal deficits. At fiscal year-end March 2020, Moody’s projects government deficits to be about 3.7 percent of gross domestic product (GDP) for the central government (slightly wider than the 3.4 percent posted in fiscal 2019) and around 3 percent for states, adding up to a general government deficit of about 6.7 percent.

“As slowing growth and continued infrastructure spending are likely to keep state-level deficits elevated, we expect the central government will continue to face challenges in achieving its fiscal consolidation targets,” Josifov added.

Infrastructure needs

Further, Indian states’ debt burden is also expected to increase to fund significant infrastructure needs. States' gross borrowing needs are budgeted at Rs 7.5 trillion ($104 billion or 3.4 percent of national GDP) for fiscal 2020, a 28 percent increase over fiscal 2019 levels.

Earlier this month, Moody’s cut India’s sovereign credit rating outlook to ‘negative’ from ‘stable’ while affirmed the Baa2 foreign-currency and local-currency long-term issuer ratings for India, the second lowest investment grade score.

It cited “increasing risks that the country’s economic growth will remain materially lower than in the past” and the resultant gradual rise in an already-high debt burden.

States’ deficit poses a challenge to India’s fiscal consolidation target, says Moody’s

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