As a result of the economic downturn and structural costs, the fiscal deficit level of the states will remain high

Mumbai, Ta. November 27, 2019, Wednesday

The level of fiscal deficit will be high at the state level due to the slowing economic growth and the ongoing need for structural expenditure in the states of the country which will make the country's fiscal discipline efforts more challenging.

Structural and cyclical factors have made it difficult for the government to maintain fiscal discipline in the medium term amid a dwindling economy. The states of India who cannot afford enough resources to meet their expenditures and who have to rely on the central government's grants have made a huge deficit in recent years.

Due to the implementation of Goods and Services Tax (GST), the share of states in their own sources of income has dropped, rating agency Moody's said. In a report issued on Wednesday, Moody's highlighted the financial position of India and its states.

Earlier this month, Moody's had India's credit rating outlook negative. The economic downturn and the increase in debt ratio led to this shift. India's budget deficit at the end of the current fiscal year is estimated at 3.70 percent of GDP, which is higher than the government's target of 3.30 percent.

The rating agency noted that the deficit will increase due to the reduction in corporate taxes and the economic slowdown.

States have to rely on the money transferred from the central government and the GST has reduced flexibility in their source of income. Due to GST, many of the indirect taxis have been eliminated which was the main source of income for the states.

Revenue from GST has been much lower than expected. However, the Center is bound to compensate the states for their revenue deficit for five years after implementation.

In the current fiscal year, the fiscal deficit of the Center is expected to increase to 3.70% while the states are expected to remain 3%. Thus, the combined deficit figure of the Center and States is 6.70%. As the deficit of the states increases, the debt situation will also increase. States will be forced to increase debt to meet infrastructure needs.

In the current fiscal year, the state's gross borrower requirement is set at Rs 7.50 trillion, which is 28 per cent higher than the last fiscal year.