The Goods and Services Tax compensation requirement of nine major states could be as much as Rs 70,000 crore in fiscal 2020, ratings firm ICRA has estimated. This would put significant pressure on the central government’s accounts which are already under stress from the cut in corporate tax rate and other stimulus measures. Considering lower-than-expected GST collections ICRA estimates this revenue to fall Rs 3.5 lakh crore short at the central level for this fiscal year compared with the July 2019 budget estimate of Rs 24.6 lakh crore the total shortfall for all states could touch Rs 2.2 lakh crore in FY20.
Apart from this, the timing of the release of GST grants to state governments pose a key risk to the cash flows of the states, considering the size of the amount in question. “The nine states that we have studied are likely to require a sizeable Rs 60,000-70,000 crore as grants for GST compensation in FY2020, twice as high as the compensation they received in FY2019. The timing of release of such grants by the GoI (Government of India) to the states would critically affect their cash flows and the pattern of fundraising in the rest of this fiscal,” said ICRA’s group head-corporate sector rating, Jayanta Roy. This further poses a two-part risk for the states.
A shortfall in their revenue implies a revenue expenditure side risk on additional outgo towards welfare schemes, drought and flood relief, and salaries. On the other hand, ICRA estimates that states would increase issuances of state development loans to plug the gap, resulting in higher state fiscal deficits. The nine states that were covered in this study were Karnataka, Kerala, Gujarat, Maharashtra, Punjab, Haryana, Rajasthan, Tamil Nadu and West Bengal. These have budgeted for an aggregate fiscal deficit of Rs 3 lakh crore in their respective FY20 budget estimates. These figures amount to around 2.5% of their gross state domestic product (GSDP), according to ICRA, which is below the 14th Finance Commission’s threshold state fiscal deficit at 3% of GSDP.