Ind-Ra Maintains Neutral Stance on Indian States' Fiscal Prospects for FY25

Ind-Ra take on States Finances: India Ratings and Research (Ind-Ra) has reaffirmed a neutral outlook on the financial trajectory of Indian states for the fiscal year 2024-25 (FY25). Anuradha Basumatari, Director of Public Finance at Ind-Ra, emphasized the containment of revenue deficits as a pivotal factor providing states with increased fiscal manoeuvrability, particularly in favour of capital expenditure.

Projections for FY25 suggest a slight improvement in the aggregate revenue deficit, standing at 0.4 per cent of gross domestic product (GDP), compared to the preceding fiscal year's 0.5 per cent. Additionally, Ind-Ra anticipates a marginal reduction in the aggregate fiscal deficit of all states, estimating it to be 3.1 per cent of GDP, down from the revised 3.2 per cent recorded in FY24.

The revision in FY24's fiscal deficit was primarily attributed to lower-than-expected revenue receipts, primarily stemming from a decline in grants from the central government. However, buoyant growth in tax revenue helped mitigate this decline.

Ind-Ra's analysis underscores a 9.5 per cent year-on-year growth in aggregate revenue receipts for FY24, propelled by states' tax revenue. Looking forward to FY25, the agency anticipates a similar growth trajectory in revenue receipts, albeit with a noted hindrance from lesser-than-budgeted grants.

Examining the budgets of 26 states (excluding Arunachal Pradesh and Sikkim), Ind-Ra observed a 7.4 per cent decrease in budgeted grants from the centre for FY25 compared to the revised estimate of FY24.

Aligned with the anticipated growth in revenue receipts, Ind-Ra forecasts an 8.7 per cent year-on-year increase in revenue expenditure for FY25. Furthermore, the agency expects aggregate capital expenditure (capex) to maintain its position at 2.8 per cent of GDP in FY25, consistent with previous fiscal year levels.