Infomerics’ analysis of the credit worthiness of a State Government is carried out on a “stand alone” basis and centres on the ability and the willingness of the State Government to honour its financial obligations in a timely manner without the benefits of any additional external support. However the rating will reflect the degree of Central Government support, whether implicit or explicit, or if the form of support is fiscal (e.g. budgetary transfer) or financial (e.g., debt guarantees or credit enhancements).



The development of Indian capital markets is fast removing the notion of State Government debt being risk free in nature. The recent past has seen various State Governments walking on the edge of severe liquidity constraint. There also have been instances where State Governments raised money through special purpose vehicles set up for infrastructure projects, but channelled the resources to meet revenue expenditure. In its annual study on State Government Budgets, the Reserve Bank of India has reiterated that State Government guarantees are not substitutes for an effective credit appraisal and monitoring mechanism. In addition to the SPVs, there are many state government enterprises which borrow funds, mostly through public issue and/or private placement of Bonds.

In view of the above, there is a need for credit rating of State Governments in the Republic of India, which is more in the nature proxy/shadow rating; although the rating process and methodology are same with rating of direct borrowing programme of state government.



The rating analysis of State Government comprises both qualitative and quantitative factors. Generally, the qualitative factors include the characteristics of the institutional framework, political factors associated with inter-governmental relations, socio-economic profile, geographical superiority and other elements that offer an insight into the fundamentals of the state.

In terms of quantitative factors, Infomerics analyses States in relation to the trends and projections of public finances and debt level. The quantitative analysis offers mainly a prediction of the ability or capacity to pay financial obligations. Nevertheless, Infomerics recognises in its methodology that both the quantitative and qualitative factors can influence, either jointly or singly, state’s ability to pay its financial obligations.



A study of the administrative framework is a fundamental and necessary beginning to Infomerics’s rating process. With a clear view of the inter-governmental relations, the processes will shift to other factors, including the socio-economic profile of the area, public finances, and debt position.

A detailed description of the state’s administrative hierarchy and types of public services available, quality of state officials will enable Infomerics to assess the degree of autonomy, demand for capital, and other fundamental credit factors.



Infomerics assesses the economic base of a state to evaluate the long-term potential for stability of its revenue structure during economic cycles, job-losses, employment shift in key industries and other situations. A diverse economy is a positive credit factor. Infomerics would evaluate any dominant employer or industrial sector, as its performance may potentially jeopardise the creditworthiness of the state.

Infomerics will view an state’s strategic importance such as the major commercial centre, proximity to ports, consumer and financial markets favourably. It will also include the availability of basic infrastructure resources such as power, transportation systems, health and waste water treatment facilities and modern telecommunication services.

Demographic trend is also a significant component of the rating analysis, especially for fund allocation for elementary & secondary education and public health. In addition, population characteristics can be decisive in terms of the magnitude of certain liabilities such as pension, the debt of hospital system run by the state, and fresh borrowings to finance substantial capital investments to meet the demands of growing population.



  • Per Capita NSDP (Net State Domestic Product)
  • NSDP Composition
  • Literacy Rate
  • Rural Electrification Density
  • Density of roads and railways
  • Proximity to all-weather ports
  • Population growth rate
  • Population mix
  • Poverty Level
  • Urban Concentration
  • Per Capita sanctions & disbursements by Financial Institutions/Banks
  • Geographic advantage



Infomerics evaluates the financial of the state to measure the degree of flexibility during times of economic stress. The ongoing liquidity of a state in meeting current obligations and debt servicing is a critical credit consideration. Other credit elements include revenue diversity, autonomy to raise taxes, ability to balance financial operations over the economic cycle, willingness to control expenses, cash flow management and the weight of capital investments on the fiscal performance of the entity. Consistent financial management and a tradition of conservative budgeting usually indicate a growing local economy.

In analysing the credit profile of State Governments, Infomerics acknowledges the nuances of Indian public finance and the dynamics of a federal economy. The presences of formulae based tax revenue sharing arrangement as enshrined in the tenets of the constitution imply a certain degree of robustness to state finances.



  • Per Capita NSDP (Net State Domestic Product)
  • NSDP Growth Rate
  • Gross Fiscal Deficit / NSDP
  • Primary Deficit / NSDP
  • Debt / NSDP
  • Interest Payment / Revenue Receipts
  • O/s Guarantees / NSDP
  • State’s Own Revenues / Aggregate Expenditure
  • Capital Outlay / Gross Fiscal Deficit
  • State’s Own Tax Revenues / Revenue Expenditure
  • Internal Debt / Revenue Receipts
  • (Interest Payments and Pensions) / Revenue Receipts
  • Non Developmental expenditure / Revenue Receipts
  • Trends in Revenue and Expenditure



Strong budgetary numbers and a sound socio-economic base should translate into better economic performance for a State, either in the present or in the near expected future. This is partly the goal of any development oriented economic policy. This bears great importance in a federal democracy where economic results are the tools for the electorate to judge the performance of the legislature.



  • Industrial Policy & Investor conduciveness
  • Deviation from Budgetary Targets
  • Trend in recourse to Ways-and-Means advances (WMA)
  • Performance of State level PSUs
  • Proportion of sick industrial units
  • History of defaults on guaranteed debt
  • Political and quasi-economic stability



It has been stated that both quantitative analysis and qualitative judgement are used to gauge the credit profile of State Governments. The qualitative judgement will take the quantitative analysis to its logical conclusion by including,

1.    Forecasting the Revenue and Capital account of State Government and performing a stress analysis on the budgetary indicators.

2.    Analysing the strength of the senior administrative team and its view towards crucial fiscal responsibility measures.

3.    The stability of a well defined economic policy.

4.    Adherence to the FRBM parameters.

Apart from this, the rating exercise will place great importance to key indicators and their behaviour under stress.



  • Debt / NSDP
  • Interest Payment / Revenue Receipts
  • O/s Guarantees / NSDP
  • State’s Own Revenues / Agg. Expenditure
  • State’s Own Tax Revenues / Revenue Expenditure
  • (Interest Payments and Pensions) / Revenue Receipts
  • Non Developmental expenditure / Revenue Receipts
  • Trends in Revenue and Expenditure
  • Political and Quasi-economic instability