Global rating agency Moody’s expects the Centre’s fiscal deficit to touch 3.7 per cent of the GDP. For all States put together, it is estimated to be three per cent.

The Centre has targeted to keep the deficit at 3.3 per cent for the current fiscal (2019-20), but it has already reached 92.6 per cent of the Budget estimate in first six months of the current fiscal.

“Persistent spending pressures and slower economic growth will result in continued fiscal deficits,” the agency said in its report while adding that by fiscal year-end March 2020, it is projected that government deficits will be about 3.7 per cent GDP for the Centre (slightly higher than the 3.4 per cent posted in fiscal 2019) and around 3 per cent for States, adding up to a general government deficit of about 6.7 per cent.

It said that the government was facing growing challenges meeting its medium-term fiscal consolidation goals amid a slowing economy, which has been driven by a combination of both cyclical and structural factors.

In particular, States, which do not generate sufficient revenues for their spending needs and remain dependent on central government grants, have recorded larger deficits in recent years. Implementation of the Goods and Services Tax further reduced States’ share of own source revenues.

“Slowing growth and continued infrastructure spending needs will keep State-level deficits elevated, further challenging India's general government fiscal consolidation efforts,” it mentioned.

The agency said that States remain reliant on the Centre’s transfers and GST has reduced flexibility in their revenue sources. The introduction of the GST replaced many indirect taxes previously levied by the States, reducing the share of own source revenue in their total revenue.

As a result, States now rely on the Centre or the GST Council for a majority of their revenue, with variations across states. Moreover, GST revenue has been below expectations since its launch, though the Centre has agreed to compensate States for any revenue shortfalls due to the GST for five years.

Budget estimates indicate that 16 States expect to record higher debt/revenue ratios in fiscal 2020. Debt levels, however, vary significantly across the States. The debt levels of Punjab, West Bengal, Haryana, Kerala, Rajasthan, Tamil Nadu and Gujarat are above the sector average, ranging between 201 per cent and 284 per cent of operating revenue.

On the other hand, the debt levels of Chhattisgarh, Uttar Pradesh, Odisha, Bihar, Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram and Nagaland are significantly below the sector average and will remain between 50 per cent and 100 per cent of operating revenue in fiscal 2020.

The agency noted that States’ capital expenditures rose to ₹5.4 trillion 2018-19, representing 19 per cent of total expenditures, from ₹3.9 trillion or 16.9 per cent in fiscal 2018. According to the latest Budget, capital expenditures is estimated to grow only slightly to ₹5.5 trillion in fiscal 2020.

The expansion of capital spending since 2018 was mainly led by Bihar, Gujarat, Karnataka, Madhya Pradesh, Maharashtra and Uttar Pradesh.