Indian states’ weaknesses outweigh their strengths as they battle the Coronavirus (Covid-19) pandemic and they need financial support from the federal government, which is already dealing with drastically reduced revenue, according to S&P Global Ratings.
The Covid-19 pandemic could increase budget deficits and indebtedness of state governments as spending needs to exceed revenue collected, S&P Global analysts YeeFarn Phua and Ruchika Malhotra said in a report. The federal government and the Reserve Bank of India will remain key pillars for states’ fiscal framework and performance, they said.
- Established record of extraordinary support from the central government and the Reserve Bank of India
- India’s well-established federation, with state governments having a strong voice in intergovernmental affairs
- Unified independent judiciary that interprets laws
- Structural deficits due to persistent revenue-expenditure mismatch, exacerbated by COVID-19
- Sectorwide high indebtedness that reflects structural deficits
- Good transparency but weak accountability
- Lack of long-term financial planning
The pandemic has ravaged revenues of both the federal and state governments and threatens to slow the economy’s recovery from an unprecedented contraction last year. Prime Minister Narendra Modi’s government is on course to borrow about $22 billion this year to pay states for their loss of income due to a shortfall in a nationwide consumption tax collection.
Still, in the next two years Indian states will struggle to consolidate their deficits, which will will run at more than 25% of revenue, according to the analysts, who expect a meaningful consolidation in the year ending March 2024.
That could affect the pricing and eventual cost of bonds sold by states, the S&P analysts wrote.
“Covid-19 will create some permanent scars on states’ balance sheets,” Phua and Malhotra said in the report. “As the central government’s revenues stabilize further and gains from tax reforms start to materialize, we expect it to pass on some of the benefits to states via shared taxes and grants.”
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.