Wednesday, 18 July 2018

The Reserve Bank of India ‘Report on State Finances’ - Source: BusinessLine, Economic Times


Highlights:

  • RBI has warned that many States may face fiscal risks this year.
  • States budgeted a gross fiscal deficit (GFD) to gross domestic product (GDP) ratio of 2.7% in 2017-18.
  • The GFD-GDP ratio crossed the threshold for the third consecutive year.
  • For 2018-19, the states have budgeted for a consolidated GFD of 2.6% of GDP.
  • Outstanding liabilities of States grew at double digits for all years barring 2014-15.
  • Maharashtra, Uttar Pradesh, TN and WB had the largest shares of market borrowings in 2017-18.
  • Among the Special Category States (SCSs), Assam, Himachal Pradesh, J&K and Uttarakhand were the major borrowers.
  • The growth of gross market borrowings of SCSs during 2017-18 outstripped that of non-special category States by a wide margin of 7%.

Causes:

  • Fiscal deficit of states is essentially due to shortfalls in own tax revenues and higher revenue expenditure.
  • State budgets have been under pressure due to:
  • committed expenditures on account of pay commission awards
  • interest payments
  • expenditures from State-specific schemes like farm-loan waivers
  • issuance of UDAY (Ujwal Discom Assurance Yojana) bonds in 2015-16 and 2016-17
  • In the aftermath of the 2008 global financial crisis, States borrowed big from markets.
  • It was mainly due to the additional fiscal space given to states as part of stimulus measures.
  • The 10-year bonds had now reached maturity.
  • This has increased the redemption pressures on the States that issued them.
  • This would imply that the borrowings of States are expected to rise.
  • Also, a substantial portion of the outstanding State Development Loans (SDLs) will mature in the next 3 years.
  • This would keep the redemption pressure high in the near future.

Suggestions:

  • The resultant slippage in fiscal deficit target could probably reflect in higher borrowing requirements for 2018-19.
  • This, in turn, could be an impact on borrowing costs.
  • RBI has thus suggested reducing leakages and enhancing efficiency of the public distribution system.
  • This would rationalise the expenditure of the states.
  • Also, improved public financial management practices may be necessary to rebuild the fiscal space.
  • It is essential to undertake fiscal reforms, so as to lower borrowings.
  • Otherwise, borrowings could add to the concerns on debt sustainability.
  • There is also a need for larger and faster corrections in primary deficits.
  • These are essential to adhere to the revised Fiscal Responsibility and Budget Management (FRBM) target.
  • It stipulates a target of 20% for the State-level debt to GDP ratios by 2024-25.
 Source: BusinessLine, Economic Times



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