The states’ fiscal position may get challenged in the run-up to the general election, the implementation of 7th Pay Commission recommendations by states, and farm loan waivers in certain states.
All these are resulting in states’ high market borrowing, which is the chief source of funding of their gross fiscal deficits.
The Centre is showing a stable borrowing programme, but states are piling up debt issuance. While 66 per cent of Centre’s deficit will be financed by market borrowing, whereas for states it is nearly 91 per cent.
“The financing of the gross fiscal deficit (GFD) through market borrowings, which constituted a small fraction of sources of financing before 1990, increased significantly to 74.9 per cent in 2017-18. Therefore, it is not surprising to note that gross as well as net market borrowing of state governments is budgeted to be similar to that of the Central government in the current fiscal year,” Kanungo said.
Including the redemption of around Rs 1.3 trillion, gross market borrowings by states are expected to cross Rs 6 trillion in FY19. This is slightly more than the Central government’s gross borrowing numbers for the fiscal year.
This is pushing up yields for both states and other classes of debt, including that of the sovereign.
States are also burdened by the liabilities of state power utilities under the UDAY scheme. In aggregate, states’ gross borrowings are budgeted to rise to Rs 5.5 trillion, which is 2.9 per cent of GDP, while net borrowings are expected to rise to Rs 4.2 trillion or 2.3 per cent of GDP in 2018-19.
The Centre kept the FRBM target of 3 per cent only once, in 2007-08. Now the FRBM target is pushed to 2020-21.
“Growing fiscal imbalance, whether by the Centre or states, can derail fiscal consolidation at the general government level. General government deficit of India rules at a very elevated level amongst the G-20 countries,” said Kanungo.