Economic activity in India is improving gradually with the second wave of the Covid-19 pandemic abating. Covid-19 cases are also trending down. Additionally, India has ramped up its vaccination program, as vaccine supplies improved. With the late pick-up in rains, the cumulative deficiency in this monsoon season has come down to 4% of the long-period average from 10% a few weeks ago. Moreover, sowing is now 102% of the normal levels. We expect agricultural gross domestic product (GDP) to grow 3% this fiscal.

The national trends often mask important state-level developments, which are quite varied. We explored the state-level impact of the pandemic and prospects based on the available high-frequency data. We found that states that suffered the fastest decline in GDP growth in fiscal 2021 also saw the slowest growth during the pre-pandemic period. While both the central and state governments saw steep declines in revenue receipts last fiscal, receipts of states (particularly tax revenue) suffered disproportionately more.

Interestingly, despite the revenue crunch, many states have met their firstquarter targets on capex. High-frequency data shows that states with a larger share of agriculture and industry are more resilient and these, together with the intensity of the pandemic, are shaping economic activity across states.

To sum, this fiscal is expected to be a year of recovery from the pandemic, as we learn to live with the virus. States with greater dependence on industry (especially manufacturing) could see the pace of recovery pick up, if cases stay under control. Contact-based services may see an impetus if the current pace of vaccination continues.

But the decline in revenue for states last fiscal has meant increased borrowing to plug the gap between revenue and expenditure. The result is a rise in fiscal deficit of states to 4.1% of gross state domestic product (from 2.7% in the year prior). The deficit may slightly moderate this fiscal, as economic activity, and consequently, revenues recover. However, from fiscal 2023, support from the Centre may pull back, with reduction in Goods and Services Tax compensation and lower revenue deficit grants as formulated by the 15th Finance Commission. Hence, it is essential that states shore up their own revenue in anticipation of the Centre's reduced support and also to meet their growing expenditure requirements.