India Ratings and Research (Ind-Ra) expects the aggregate fiscal deficit of Indian states to increase marginally to 3.3% of gross domestic product (GDP) in FY18 from its forecast of 3.2% for FY17. The agency has maintained its forecast for FY17. The aggregate state's debt/GDP ratio may increase marginally to 24.3% in FY18 from Ind-Ra’s forecast of 24% for FY17.

The central government is evaluating the report of the N. K. Singh panel on Fiscal Responsibility and Budget Management, which allows the fiscal deficit of the central government to be increased by 0.5% of GDP. Ind-Ra believes once the report is accepted, states would also make suitable changes in the fiscal deficit targets specified under their Fiscal Responsibility and Budget Management acts.

Ind-Ra estimates the net market borrowings of states will increase to Rs 3.7 trillion in FY18 from its forecast of Rs 3.5 trillion for FY17. However, as a percentage of GDP, states' net market borrowings is likely to moderate to 2.2% in FY18 from its forecast of 2.3% for FY17.

Ind-Ra expects goods and services tax to be implemented from July 2017.Ind-Ra believes the proposed compensation of Rs 500 billion by the central government to state governments to cover revenue losses post tax implementation will be sufficient.

Ind-Ra expects demand for petroleum products in FY18 to increase 9.5% yoy and the prices of Indian crude basket to increase to Rs 4,015/bbl from Rs 3,122/bbl in FY17 (April-January). Ind-Ra expects states with a higher proportion of revenue from petroleum products in own tax revenue to benefit from the increase in crude oil prices.

On the expenditure side, Ind-Ra expects the aggregate capital expenditure/GDP ratio of states to remain stable at 3.4% in FY18, same as in FY16 and FY17 (FY15: 2.5%). Despite a salary revision, Ind-Ra expects select committed expenditure (in the form of salary, pension and interest payments)/current expenditure ratio to remain stable in FY18.