State governments’ market borrowings may result in the accumulation of debt liabilities which, if unchecked, could pose major challenges for macroeconomic and financial stability, cautioned a Reserve Bank of India report.

The composition of States’ outstanding liabilities indicates greater reliance on market borrowings over the years — they constituted 69.7 per cent of outstanding liabilities of States at end-March 2015 and is budgeted to reach 74.7 per cent by end-March 2017. The share of National Small Savings Fund (NSSF) in outstanding liabilities and States’ dependence on loans from the Centre, however, continued to decline.

State governments face severe resource constraints as their non-debt receipts are often insufficient for fulfilling their developmental obligations. Over the years, market borrowings have been a dominant source of financing the gross fiscal deficit (GFD).

According to the report, ‘State Finances: A Study of Budgets of 2016-17’, “over a period of time, such borrowings may result in the accumulation of debt liabilities which, if unchecked, could pose major challenges for macroeconomic and financial stability.” Redemption of special securities issued under financial restructuring plans (FRPs) for State-owned discoms entails large repayment obligations from 2018-19.

“Special securities issued under FRPs are significantly larger in size; consequently, repayment pressure will be aggravated from 2018-19,” warned the report. According to RBI records, gross market borrowings of States at ₹3,81,980 crore in 2016-17 — comprising around 85 per cent of GFD — increased 29.7 per cent over the previous year. In contrast, the contributions of NSSF, reserve funds, deposits and advances have reduced.

The report observed that the increasing reliance on market borrowing, along with the enabling conditions for additional borrowing by States as provided by the Fourteenth Finance Commission, poses challenges for the sustainability of State finances as higher State borrowings raise yields and the cost of borrowings.

The combined gross market borrowings of the Centre and the States increased by 7.1 per cent during 2016-17. According to information available for 25 States, the RBI said the gross fiscal deficit to gross State domestic product (GFD-GSDP) ratio is budgeted at 2.6 per cent during 2017-18 compared with 3.4 per cent during 2016-17 (Revised Estimate).

“There are, however, several downside risks like implementation of recommendations of States’ own pay commissions, farm loan waiver in some States, and revenue uncertainty on account of implementation of Goods and Services Tax (GST).

“On a comparable basis, the revised estimates of the GFD for 2016-17 were higher by 0.4 percentage points over the budgeted ratio — raising concerns about potential fiscal slippage,” the report said.

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