India's Strong Economic Growth Shields State Finances from Deterioration

India's robust economic expansion is shielding state finances from worsening. Despite ongoing spending needs and revenue gaps, strong growth is boosting revenues. This expansion is expected to keep credit risks manageable. State governments are crucial for development, handling significant public expenditure.

New Delhi: 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.

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.

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.

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 stabilise, with growth in operating revenues central to this stabilisation," the report said.

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.