The Reserve Bank of India has warned that many States may face fiscal risks this year due to farm-loan waivers, Pay Commission awards and elections.

In its ‘Report on State Finances’, the central bank said that if the likely slippage in fiscal deficit is reflected in higher borrowing requirements for 2018-19, there could be an impact on borrowing costs.

“Committed expenditures on account of pay commission award[s] and interest payments, coupled with expenditures from State-specific schemes like farm-loan waivers, have been generating pressures on State budgets,” the report said.

It also made suggestions to improve the situation. “Reducing leakages and enhancing efficiency of [the] public distribution system, coupled with improved public financial management practices may be necessary to rebuild [the] fiscal space.”

The report said that while market borrowings provide an easy access to finance for States, the lack of incentives to undertake fiscal reforms, so as to lower borrowings, could add to the concerns on debt sustainability.

Referring to the aftermath of the 2008 global financial crisis, when States borrowed big from markets, mainly due to the additional fiscal space given to them as part of stimulus measures, the RBI said several 10-year vanilla bonds had reached maturity from 2017-18, increasing redemption pressures on the States that issued them. This would imply that the borrowings of States are expected to soar.

At the end of March, 67.2 per cent of the outstanding State Development Loans (SDLs) were in the residual maturity bucket of five years and above. About 16.7 per cent of outstanding SDLs will mature in the next three years, keeping redemption pressure high in the near future.

Maharashtra (10.7 per cent), Uttar Pradesh (9.9 per cent), Tamil Nadu (9.7 per cent) and West Bengal (8.8 per cent) had the largest shares of market borrowings in 2017-18. Among the Special Category States (SCSs), Assam (1.9 per cent), Himachal Pradesh (1.1 per cent), Jammu and Kashmir (1.5 per cent) and Uttarakhand (1.6 per cent) were the major borrowers.

The growth of gross market borrowings of SCSs, at 58.9 per cent during 2017-18, outstripped that of the non-special category States by a wide margin (7 per cent).

Outstanding liabilities of States grew at double digits for all years barring 2014-15. These liabilities in 2018 (revised estimate ) rose to ₹40.22 lakh crore (from ₹36.29 lakh crore in 2017) and are expected to touch ₹45.40 lakh crore in 2019 (Budget Estimate).

The issuance of UDAY (Ujwal Discom Assurance Yojana) bonds in 2015-16 and 2016-17, farm-loan waivers and the implementation of Pay Commission awards led to a higher debt-GDP ratio at 24 per cent in 2017-18 (RE), which is expected to rise to 24.3 per cent in 2018-19 (BE).

“...better fiscal marksmanship and efficiency of expenditures appear essential to providing robustness to state finances if revenue receipts end up again in shortfall relative to budgeted levels,” said the RBI report.

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