Indian states face difficulties in reducing deficits, challenging the country's ability to meet medium-term fiscal consolidation goals as economic growth slows, Moody's Investors Service said in a new report released on Wednesday.
"Indian states do not generate sufficient own source revenue to cover their spending needs. The introduction of Goods and Services Tax (GST) in 2017 has further increased states' reliance on central government transfers," said Moody's Assistant Vice President and Analyst Gjorgji Josifov.
"As slowing growth and continued infrastructure spending are likely to keep state-level deficits elevated, we expect the central government will continue to face challenges in achieving its fiscal consolidation targets," added Josifov.
The implementation of the GST in July 2017 replaced many indirect taxes levied by the states with centralised GST rates. As a result, states are now more reliant on the central government for revenue, with the central government accounting for almost half their revenue.
Meanwhile, persistent spending pressures and slowing economic growth will keep state-level deficits high at about 3 per cent of GDP for the fiscal year ending March 2020. Coupled with the projected 3.7 per cent deficit for the central government, this will bring the general government deficit to about 6.7 per cent.
Without policy changes, Moody's expects states' deficits to stay around current levels which will continue to challenge general government (combined central and state) fiscal consolidation.
As a percentage of GDP, states' outstanding debt will remain around 25 per cent in fiscal 2019 and 2020. To achieve the Fiscal Responsibility and Budget Management (FRBM) Act baseline scenario of debt-GDP reaching 20 per cent by 2024-25 will require significant expenditure cuts and much higher revenue growth.
Moody's report forms part of its continuing research on the debt and finances of India's states and local governments, and the central government's efforts to reduce deficits and debt.
As a result of GST, states are now more reliant on the central government for revenue, with the central government accounting for almost half their revenue.