FY21 central tax devolution to states expected to fall by over 36%: ICRA

Ratings agency ICRA has estimated that central tax devolution (CTD) to the states will be 36.2 per cent lower than the budgeted amount in the FY21 Union Budget.

Accordingly, the CTD is expected to be around Rs 5,00,500 crore (Rs 5,005 billion) in FY2021 from the budgeted Rs 7,84,200 crore (Rs 7,842 billion).

"If the state governments exhaust a large portion of their permitted borrowing for FY2021 within 9M FY2021, the anticipated YoY decline in CTD in Q4 FY2021 could lead to fiscal and liquidity stress for the states in that quarter," ICRA said in a report.

At present, open market borrowings or state development loans (SDLs) are the chief source of funding the fiscal deficit of the Indian state governments.

"The gross SDL issuance expanded by a substantial 56.8 per cent to Rs 3,536 billion in H1 FY2021 from Rs 2,254 billion in H1 FY2020," the report said.

"ICRA estimates that Rs 511 billion of SDLs were redeemed in H1 FY2021, lower than the estimated redemption of Rs 674 billion in H1 FY2020. Accordingly, the net SDL issuance rose by an even higher 91.4 per cent in H1 FY2021 to Rs. 3,025 billion from Rs. 1,580 billion in H1 FY2020."

Resultantly, high market borrowings by the state governments in H1 FY2021 reflect the expectedly wide gap between their revenue receipts and expenditure led by the adverse impact of the Covid-19 pandemic on the fiscal health of the state governments, the report said.

Additionally, the indicative calendar of market borrowings for Q3 FY2021 released by the Reserve Bank of India (RBI) pegs the market borrowing of 26 state governments and two Union Territories (UTs) at Rs 2,022 billion, 24.9 per cent higher than the total SDL issuance of Rs 1,619 billion in Q3 FY2020.

"The step up in the volume of borrowing indicated for Q3 FY2021 is surprisingly muted, relative to Rs 1,673 billion in Q1 FY2021 and Rs 1,863 billion in Q2 FY2021," the report said.

"In our view, the actual borrowings in Q3 FY2021 could appreciably overshoot the indicative amount, especially given the absence of participation indicated for West Bengal (WB) in Q3 FY2021."

Furthermore, it said that based on estimate for full year SDL issuance for FY2021 and the borrowing concluded in H1 FY2021, "we project the gross SDL issuance in H2 FY2021 at Rs 6,797 billion, if the borrowing related to GST compensation would be through SDLs".

"This is sharply higher than the planned issuance of Rs 4,340 billion of dated securities indicated by the GoI in its borrowing calendar for H2 FY2021," the report said.

"The expected net SDL issuance for Q4 FY2021 imputed by subtracting the figure for 9M FY2021 from ICRA's estimated full year forecast for FY2021, is projected at a huge Rs 4,370 billion, twice as high as the Rs 2,151 billion issued in Q4 FY2020. Moreover, factoring in the estimated SDL redemption of Rs 404 billion, the gross SDL issuance is estimated to expand to a sizeable Rs 4,774 billion for Q4 FY2021 from Rs 2,471 billion in Q4 FY2020."