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India Ratings has revised the outlook on state finances to ‘improving’ in FY23 from ‘neutral’ and it expects the aggregate fiscal deficit of the states to come in at 3.6 per cent of their gross domestic product from 3.5 per cent in FY22 on the back of robust revenue growth. The agency had earlier forecast the fiscal deficit of the states to print in at 4.1 per cent. The upward revision is due to the better-than-expected growth in revenue receipts and higher growth in the nominal GDP in FY22.

The agency also estimates the national nominal GDP to grow 17.6 per cent this fiscal, higher than the previous estimate of 15.6 per cent. Accordingly, it expects gross and net market borrowings by the states in FY22 to be lower than at Rs 6.6 lakh crore and Rs 4.6 lakh crore, respectively, than its previous estimate of Rs 8.2 lakh crore and Rs 6.2 lakh crore. Their gross and net market borrowings are estimated at Rs 7 lakh crore and Rs 4.63 lakh crore, respectively, in FY23 due to an improvement in states' aggregate revenue receipts and higher tax devolution from the Centre.

The quality of the fiscal deficit, which is revenue deficit as a percentage of fiscal deficit, is likely to improve in FY22 and FY23, after deteriorating in the previous two fiscals of 2020 and 2021 due to the impact of the pandemic on the states' revenue receipts. The analysis is based on the information on 26 states during this fiscal till November. The aggregate revenue receipts of these 26 states grew 25.1 per cent annualised to Rs 16.4 lakh crore during April-November, while revenue expenditure of these states grew only 12 per cent.

It also expects the states' aggregate debt to GDP ratio to increase marginally to 29.5 per cent in FY23 from 29.3 per cent in FY22 keeping with the debt burden trajectory recommended by the 15th Finance Commission for the FY22-26 award period. The Finance Commission has recommended the states' aggregate debt/GDP at 31.3 per cent for FY23.