States’ revenue deficit will narrow to 0.4% of GDP in FY25: Ind-Ra

Declining Revenue deficit: states' combined revenue deficit will narrow to 0.4 per cent of GDP for FY25, a slight improvement from 0.5 per cent recorded in FY24. Moreover, aggregate fiscal deficit across all states is anticipated to decrease marginally to 3.1 per cent of GDP in FY25, down from revised figure of 3.2 per cent in FY24, driven by lower-than-expected revenue receipts, primarily attributed to a decline in central government grants despite robust tax revenue growth, India rating in its latest report ded.

India Ratings and Research (Ind-Ra) has upheld a neutral stance on fiscal health of Indian states for fiscal year 2024-25 (FY25). Director of Public Finance at Ind-Ra, Anurha Basumatari, highlights significance of containing revenue deficits, which offers states more fiscal manoeuvrability, particularly for capital expenditure, a trend expected to persist into FY25.

Looking ahe, Ind-Ra foresees states' own revenue collection and tax devolution from centre to buy aggregate revenue receipts in FY25, expected to grow by 9.5 per cent year-on-year. However, budgeted central grants for FY25 are set to be 7.4 per cent lower than FY24 revised estimates, posing a challenge to higher revenue growth.
 

Market borrowings tritionally served as primary source of financing states' fiscal deficits, constituting nearly 80 per cent on average during FY19-FY23. Yet, a trend towards reducing reliance on net market borrowings emerged in FY22 and FY23, with states opting for interest-free loans under centre’s "Special Assistance to States for Capital Investment" scheme. Ind-Ra projects net market borrowings of INR 7.6 trillion to fund 75 per cent of states' aggregate fiscal deficit in FY25.
Maintaining fiscal stability, Ind-Ra anticipates debt burden to remain consistent in FY25, with aggregate debt-to-GDP ratio forecasted to be 28.6 per cent, slightly lower than 28.7 per cent recorded in FY24.