Government's Tax Devolution May Exceed Budget Estimate In Current Fiscal: Report

Tax devolution by the central government is likely to exceed the budget estimate by at least Rs 1.1 lakh crore in 2022-23, leading to compression in the gross borrowing by states to Rs 8.4 lakh crore, a report said on Monday.

However, the borrowing cost for the states has went up from 7.17 per cent in fourth quarter of 2021-22 to 7.34 per cent on May 2 this fiscal, according to an analysis by ICRA Ratings.

The central tax devolution is likely to rise to Rs 9.3 lakh crore in 2022-23 from Rs 8.8 lakh crore in 2021-22 and from Rs 8.2 lakh crore estimated in the 2022-23 budget. The 2021-22 devolution was higher than the revised estimate of Rs 7.4 lakh crore and 2.8 per cent lower at Rs 8.1 lakh crore, Aditi Nayar, the chief economist at the agency, said.

During the first five weeks of the first quarter of this fiscal, states have borrowed 82 per cent less than what was indicated in the borrowing calendar, at just Rs 12,400 crore against Rs 67,200 crore indicated initially by 19 states, following higher-than-expected devolution in fourth quarter of 2021-22 at Rs 95,100 crore on March 24, and 31, she said.

The agency had estimated net and gross SDL (State Development Loan) issuance in 2022-23 at Rs 6.6 lakh crore and Rs 8.9 lakh crore, respectively last month. But taking into account the actual issuance, which is 82 per cent lower than indicated so far, it estimates the gross issuance at Rs 8.4 lakh crore, and adjusting for the expected redemptions of Rs 2.4 lakh crore in this fiscal, net issuance is likely to be Rs 6 lakh crore, up only 21.9 lakh crore from Rs 4.9 lakh crore in 2021-22.

The pattern of monthly tax devolution releases and the timing of GST compensation payout for December and March quarters for 2021-22 and first quarter of current fiscal will not only impact SDL issuance but also cull the demand for Ways and Means Advances (WMA) and Overdraft (OD) in 2022-23, the report noted.

The gap between the indicated and the actual SDL issuances widened to 82 per cent or Rs 50,000 crore in the first five weeks of first quarter, led by the comfortable cash flow position of the states following the highly back-ended release of the central taxes in 2021-22, with nearly half the funds released in fourth quarter of 2021-22.

"Accordingly, we expect tax devolution in FY23 to exceed the budget estimate by Rs 1.1 lakh crore, bringing down gross issuances to Rs 8.4 lakh crore this year," Ms Nayar said.

During April 1 and May 2, only Andhra (Rs 4,400 crore), Maharashtra (Rs 4,000 crore), Punjab (Rs 2,500 crore) and Haryana (Rs 1,500 crore) issued debt papers. Together, they borrowed Rs 12,400 crore, which is as much as 82 per cent lower than the Rs 67,200 crore initially indicated by 19 states for this period.

On an annualised basis, the debt sales so far this fiscal is 49 per cent of last year level, as the Centre gave higher-than-projected tax devolution to the states in fourth quarter of 2021-22.

However, despite the sharply lower supply, the weighted average cost for the states rose from 7.17 per cent in fourth quarter of 2021-22 to 7.34 per cent on May 2.

She estimates the central tax devolution to rise to Rs 9.3 lakh crore in 2022-23, up from Rs 8.8 lakh crore in 2021-22, and accordingly, the monthly tax devolution in the coming months is likely to impact the size of SDL issuances, as well as the WMA and OD draw down.

Thus, gross SDL issuance is likely to be printed at Rs 8.4 lakh crore in 2022-23, or Rs 1.4 lakh crore or 29 per cent lower than indicated for the full year.

The Centre released Rs 8.8 lakh crore to the states in 2021-22, up from Rs 7.4 lakh crore in 2020-21 and more than Rs 6.7 lakh crore budgeted for the year. Nearly half of the Rs 8.8 lakh crore in 2021-22 was released in fourth quarter. After releasing Rs 2.4 lakh crore in February 2022, it released Rs 95,100 crore in March-end.