RBI deputy governor B P Kanungo slams states for fiscal indiscipline

RBI Deputy Governor B P Kanungo
Reserve Bank of India (RBI) Deputy Governor B P Kanungo on Friday warned of fiscal profligacy in states and said signs of fiscal imbalance in states were a “matter of concern”. Kanungo said over the past decade the size of state government budgets had increased sharply “and they now collectively spend substantially more than the Union government”.

The gross fiscal deficit to gross domestic product (GFD-GDP) ratio in 2017-18, which is above 3.1 per cent, is above the Fiscal Responsibility and Budget Management (FRBM) threshold for the third consecutive year, Kanungo said in his keynote address at the financial market conclave of the Bengal Chamber of Commerce and Industry in Mumbai. The aggregate expenditure of the state governments increased to Rs 30.29 trillion in 2017-18 from Rs 12.85 trillion in 2011-12. The expenditure, according to budget estimates, is further expected to increase to Rs 33.6 trillion in 2018-19.

Growth in the states’ aggregate expenditure has outpaced that of the central government for each of the years since 2011-12.

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.

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