Pandemic could worsen indebtedness of Indian states: S&P

“India’s stronger growth than peer countries has been a key factor underpinning the sustainability of states’ fiscal performance. We expect the country’s economic growth to remain above average over the next few years. The rebound in the economy in FY2021-2022 will feed into states’ revenues, which we estimate will increase by an average of 17% annually over FY2021-2023,” the rating agency said.

The rating agency which has projected the Indian economy to grow at 9.5% in FY22 on Thursday said India’s economic recovery is expected to be less steep compared with the bounce in late 2020 and early 2021 because households are running down saving buffers to support consumption and a desire to rebuild saving could hold back spending even as the economy reopens.

In its latest report on Indian states published on Friday, the rating agency said it believes it will be hard for state governments to rapidly scale down elevated expenditures induced by covid-19. “The pandemic has led to increased spending on healthcare, social safety, and digital infrastructure. We, therefore, project balance after capital accounts deficit to average 30% of revenues over 2019-2023,” it added.

On the positive side, S&P said the extraordinary support from the central government and the Reserve Bank of India will remain a key pillar for states’ fiscal framework and performance. “The central bank has helped states with their funding needs and in navigating the uncertainties of covid-19,” it added.

A significant risk for the fiscal framework and performance of Indian states will be the ₹3 trillion power sector reforms announced in the FY2021-22 budget presented by the central government, S&P said. “While details of the proposed reform are not known yet, meaningful state participation is likely. The significant linkages between the power distribution companies (discoms) and states have led to the indebtedness of the discoms shifting to states,” it added.