Borrowings, Grants Helped States Tide Over A Tough First Quarter: India Ratings

Most Indian states saw a sharp contraction in revenue in the April-June 2020 quarter but stepped up expenditure to meet costs related to the Covid-19 crisis. They bridged the gap via increased borrowings and central grants, according to India Ratings & Research.

An analysis of the financials for the first quarter of FY21 showed significant stress on revenue and expenditure sides for states, India Ratings said in a report dated Oct.1. For the 18 states where data was available, revenue receipts contracted 18.41% over a year ago.

The analysis showed wide variation among states, with five recording a rise in revenue receipts in the quarter, while all others saw a fall. Nearly all states saw a contraction in own tax and non-tax revenues but central grants were higher and helped some states see an increase in overall revenues.

Expenditure Rises Amid Covid Outbreak

Despite lower revenue receipts, state governments increased revenue expenditure to combat the impact of the pandemic on lives, livelihoods, the economy and public health.

As such, revenue expenditure of the 18 states grew 11.7% over a year ago, showed India Ratings' analysis. Like revenue receipts, even revenue expenditure showed significant variations across states, with six being able to compress revenue expenditure to contain the fallout from the decline in receipts.

A deferral of expenses on salaries and pension, along with subsidies, helped some states keep expenditure in check.

Not surprisingly, capital expenditure saw a steep contraction.

Collectively, the capex of 18 states was down by 41.9% in the first quarter. Some states such as Andhra Pradesh, Himachal Pradesh and Kerala still saw a rise in capex over a year ago.

State Deficits

Lower revenue and higher expenditure meant that the fiscal deficit of the 18 states rose to 40.7% of the budgeted fiscal deficit in first quarter of FY21 compared to 13.4% a year ago.

As such, states relied on higher market borrowings along with expenditure compression and the devolution from the central government to remain fiscally afloat.

States, however, have been sparse in their use of the the central bank's liquidity window to tide over the fiscal crisis, the report said. States that have used this window so far, are those which have been using these facilities even previously, it added. States such as Maharashtra, Bihar, Tamil Nadu, Uttar Pradesh, Madhya Pradesh, Rajasthan, Karnataka, Jharkhand and Odisha did not use the liquidity window at all in the first quarter of FY21.