States expected to breach Fiscal Deficit targets on account of COVID-19
Sai Krishna Muthyanolla
August 14, 2020
Latest data of SDLs indicated that the borrowings by state governments increased by around 50% during the first four months of the current fiscal compared to the same period in 2019-20. This also means that most states are expected to breach the fiscal deficit targets set in the budget estimates for 2020-21.
In an earlier story, we had observed that the States have borrowed around 50% more through State Development Loans (SDLs) during the first four months of 2020-21 compared to the same period in the previous year. This period coincides with the spread of COVID-19 in India and the subsequent lockdown imposed across the country. The lockdown had a negative impact on the economy resulting in lower than expected tax revenues, forcing states to go for market borrowings for funding planned expenditure.
The State governments have over the recent years relied on SDLs to borrow money to compensate fiscal deficit.  An increase in the amount borrowed through the SDLs points to less than expected revenues through other sources.
While the overall data indicates an increase in SDL borrowings in the first four months of 2020-21, is the same trend observed across the states? Are there any states which have a different trend? In this story, we take a deeper look into the SDL borrowing trends of the big states, GSDP, fiscal deficit of the states etc.
Maharashtra, Karnataka & Tamil Nadu have the highest proportionate increase in SDL Borrowings
Karnataka has the highest proportionate increase in the borrowings through SDLs during the first four months of 2020-21 compared to the same period in 2019-20. So far, Karnataka has raised ₹ 13 thousand crores this year, compared to ₹ 3 thousand crores during the same period last year i.e. an increase of more than 4 times. During the same period in 2018-19, Karnataka did not borrow any amount through SDLs.
Tamil Nadu has raised the highest amount during the current year so far with ₹ 35 thousand crores, which is more than double of the amount raised during the same period in 2019-20. Even during the same period in 2019-20, SDL borrowing has doubled compared to 2018-19.
Maharashtra has recorded around 150% increase in their SDL borrowings during the first four months of the past two financial years. During this period in 2018-19, the borrowings were nearly ₹ 5 thousand crores, which increased to ₹ 12.5 thousand crores in 2019-20 and to ₹ 31.5 thousand in the current year 2020-21.
Other Major states which reported an increase in the SDL borrowings compared to same period last year include – Andhra Pradesh, Haryana, Kerala, Rajasthan, Telangana and West Bengal.
Meanwhile, Bihar, Gujarat and Punjab have borrowed lesser amounts when compared to the same period last year.
Bihar & Gujarat have raised fewer amount via SDL borrowings compared to last year
Bihar has borrowed ₹ 4 thousand crores in the first four months of 2020-21 compared to ₹ 4.6 thousand crores during the same period in 2019-20. It ought to be noted that in 2018-19, Bihar has not raised any amount through SDLs during this period.
Gujarat has also raised lesser amount compared to last year with around ₹ 10 thousand crores this fiscal as against ₹ 12 thousand crores last year. The amount raised during the first four months of 2019-20 was more than double of what was raised during the same time in 2018-19.
Similar trend is observed for Punjab, where in there is a decrease in the SDL borrowings compared to last year, which follows a two-fold increase compared to the borrowings in 2018-19.  Meanwhile, there was no change in the amount borrowed through SDLs by Assam & UP compared to 2019-20. For both the states, the amount borrowed during the first four months of the current fiscal is same as the amount borrowed during 2019-20. However, the amount borrowed in the first four months of 2019-20 was lesser than the amount borrowed during the same period in 2018-19.
Punjab, Andhra Pradesh, West Bengal & Rajasthan among the states with Highest Debt-GSDP Ratio
As per the recommendations of 14th Finance Commission, the States are advised to keep the debt to lower than 25% of GSDP. Although Maharashtra borrowed the highest amount via SDLs for 2020-21 so far, and also has a higher volume of debt compared to their states, its Debt-GSDP ratio is only around 16.2% (as per Budget estimates for 2020-21).
Tamil Nadu and Karnataka, which have seen a spike in SDL borrowings during the first four months of 2020-21, have their ratio at 21.8% and 19.5% respectively as per 2020-21 estimates. The debt estimate of Karnataka for the current fiscal is higher compared to the revised estimate of the last fiscal which was at 18.2 %.
Punjab, which reported a decrease in SDL borrowings compared to last fiscal has the highest Debt-GSDP ratio among the bigger states with 38.5%. The cutback in SDL borrowings thus seems to be an effort to cut down on the already mounting debt.
Bihar & U.P. which are among the states with falling SDL borrowings during this period, are among the states with a higher Debt-GSDP ratio with 30.1% & 28.8% respectively as per budget estimates of 2020-21. Uttar Pradesh also has the highest outstanding debt in terms of volume.
Rajasthan, Kerala, West Bengal, Andhra Pradesh have debt above 30% of their GDP and are also among the states which have higher increase in SDL borrowings in the current fiscal.
Both Punjab and Andhra Pradesh have significantly increased their Debt-GSDP ratio in the 2020-21 estimates compared to the revised estimate of the last fiscal.
Significant increase in the Fiscal Deficit of Andhra Pradesh as per 2020-21 budget estimates
One of the targets set as per FRBM Act 2003, is to limit ‘Fiscal Deficit’ to 3% of GDP. A review of the states’ budgets indicates that among the major states, only Andhra Pradesh has a Fiscal Deficit higher than this set target with the estimates for 2020-21 pegging the deficit at 4.78%. The Revised Estimate for last fiscal is 3.75%. As per budget estimates of 2020-21, the fiscal deficit of Bihar is at 3%. However, the revised estimate for 2019-20 is 9.5 %, as against the budget estimate for 2019-20 which pegged it at only 2.8%
Although Maharashtra & Tamil Nadu have borrowed more through SDLs, their Fiscal Deficit is better off with 2.7% & 2.8% respectively as per budget estimates for 2020-21. As observed earlier, these two states also perform better on Debt-GSDP ratio parameter.
Punjab, which has a significantly higher debt ratio, estimates its Fiscal Deficit for 2020-21 to be around 2.9%, same as that of previous fiscal’s revised estimate.
Gujarat with low  SDL borrowings so far and lesser Debt-GSDP ratio also has a lesser fiscal deficit  with only an estimate of 1.8% for 2020-21.
Fall in SOTR could increase the Fiscal Deficit of States and impact the debt position
As per the budget estimates of most of the states (with the exception of Andhra Pradesh), the fiscal deficit is pegged at around the target set by the FRBM Act. Except for Bihar, the revised estimates for fiscal deficit of the last fiscal are also within the targets. However, the fall in State revenues because of COVID-19, could play spoil sport in fiscal deficit estimates.
Early trends for 2020-21 indicate the states are resorting to increased borrowings through SDLs, which could further increase the Debt-GSDP ratio. The increase in borrowings for states like Tamil Nadu, Karnataka & Maharashtra which are also among the major economies in the country indicates that the states are trying to compensate the loss of revenues with increased borrowings.
The slump in economy could further deteriorate the fiscal position of other states forcing them to go for increased borrowings, worsening their already precarious debt position.
Featured Image: Fiscal Deficit targets of States