Covid-19 to worsen indebtedness of states despite economic rebound: S&P

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S&P Global Ratings on Friday said the Covid pandemic could worsen structural deficits and indebtedness of states, despite a likely rebound in the economy over the next 12-24 months.

The US-based rating agency expects the country’s economic growth to remain above average over the next few years and the rebound in the economy in the current fiscal ending March 31, 2022, will feed into states’ revenues.

S&P estimates revenues of states to increase by an average of 17% annually over fiscals 2021-2023.

“The Covid-19 pandemic could worsen structural deficits and indebtedness of Indian state governments. India’s stronger growth than peer countries has been a key factor underpinning the sustainability of states’ fiscal performance,” S&P said in a report titled ‘Public Finance System Overview: Indian States’.

S&P Global Ratings had cut India’s growth forecast for the current fiscal to 9.5% from 11% earlier.

The agency lowered the growth outlook saying that a severe second Covid-19 outbreak in April and May led sharp contraction in economic activity, but a gradual revival is underway.

S&P said 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.

The agency believes the extraordinary support from the central government and the Reserve Bank of India will remain a key pillar for states’ fiscal framework and performance.

“A significant risk for the fiscal framework and performance of Indian states will be the Rs 3 trillion power sector reforms announced in FY2021-22 budget presented by the central government. 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,” S&P added.