An S&P Global Ratings report finds that strong economic growth is helping Indian states manage their finances. Despite fiscal deficits and rising debt, robust expansion supports revenue growth and keeps credit risks manageable for the states.
Strong economic growth is helping prevent the finances of Indian states from deteriorating despite persistent fiscal deficits and rising debt levels, according to a report by S&P Global Ratings.
In a report titled "Indian States: Strong Growth Softens The Blow Of Fiscal Imbalances", the global ratings agency said Indian states continue to face significant spending pressures and revenue-expenditure mismatches, but robust economic expansion is supporting revenue growth and keeping credit risks manageable.
"These spending requirements will continue to weigh on the weak budgetary settings of states. That said, we expect credit risks to be manageable, on the back of robust economic expansion which in turn sustains fiscal revenue growth," S&P Global Ratings said.
Role of States in Economic Development
The report noted that state governments will play an increasingly important role in India's economic development as they account for a large share of public expenditure and infrastructure creation.
"States are responsible for roughly two thirds of total public expenditure, yet local infrastructure needs continue to be large," the report said.
Persistent Fiscal Pressures
According to S&P, states continue to grapple with fiscal pressures as spending on welfare programmes and infrastructure remains high. It said revenue-expenditure mismatches and elevated fiscal deficits are likely to persist across states over the next few years.
"Even with a tax-sharing framework and local revenue generation, there are persistent revenue-expenditure mismatches and high fiscal deficits across states," the report said.
Growth Trajectory Provides Cushion
However, the ratings agency believes India's growth trajectory will provide a cushion. It forecasts India's real GDP growth to average 6.9 per cent between fiscal 2027 and fiscal 2029, among the highest rates globally.
S&P also expects debt levels of most states to stabilise in the coming years as revenue growth improves.
"Over the next few years, we expect the debt levels for most states to stabilize, with growth in operating revenues central to this stabilization," the report said.
Reliable Access to Funding
The ratings agency added that strong support from the Reserve Bank of India and deep domestic capital markets continue to provide states with reliable access to funding and liquidity. (ANI)
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