The Reserve Bank of India has warned that State governments are likely to face several challenges to their finances during 2017-18 due to farm-loan waivers, expected implementation of the recommendations of their Pay Commissions, high level of guarantees given by them, and rising interest liabilities on account of restructuring of state-run power utilities.
In its annual report for 2016-17, the RBI observed that the announcement of farm-loan waivers by four State governments (so far in 2017-18) and the potential announcement by several others pose a major fiscal risk over the medium term. “Besides impacting credit discipline, vitiating credit culture and dis-incentivising borrowers from repayment, they may have a destabilising impact on yields of State development loans, thereby posing a higher interest burden for the States in future,” the report said.
“Concomitantly, ratchet effects can firm up the general level of interest rates and crowd out private borrowers,” it added.
The report observed that the committed liabilities of States may increase in case they decide to implement the recommendations of their Pay Commissions in 2017-18.
The high level of State government guarantees constitutes a major fiscal risk, it added. The interest liabilities of States that have participated in financial restructuring of state-run distribution companies through Ujwal Discom Assurance Yojana would increase in the years ahead.
The central bank also hinted at the possibility that many States (particularly the fiscally prudent ones) may step up borrowings, given the flexibility provided by the Fourteenth Finance Commission. “Thus, even as the Central government makes... efforts toward fiscal consolidation, the higher debt burden of the States could push up general government debt,” the report said.
Keeping in view the recommendation of the Fiscal Responsibility and Budget Management Review Committee of a sustainable debt path, the RBI said States too will need to tread the fiscal path with caution.