Farm Loan Waivers Could Push Up State Borrowings To Rs 5.3 Lakh Crore, Says ICRA
Increase in state borrowings may be restricted by fiscal restrictions.
Farm loan waivers announced by Uttar Pradesh (UP), Maharashtra, Punjab and Karnataka will push up borrowings and raise the cost of funds for states, said credit rating agency ICRA in a note on Thursday.
The magnitude of the loan waivers is expected to be around Rs 36,000 crore for Uttar Pradesh, Rs 34,000 crore for Maharashtra, Rs 10,000 crore for Punjab and Rs 8,200 crore for Karnataka.
If these waivers are funded fully through state development loans (SDL), borrowings will rise to Rs 5.3 lakh crore in 2017-18 compared to Rs 3.8 lakh crore in 2016-17, said the rating agency.
However, ICRA added that fiscal constraints may prevent the entire amount from being funded via borrowings. As such, aggregate state borrowings may not breach the Rs 5 lakh crore mark.
In ICRA’s view, the increased borrowing would push up bond yields and widen the spread between state and central government securities to above 100 basis points in the second half of this year, from around 70 basis points at present.
While the estimated debt to GSDP ratio for Karnataka and Maharashtra is low compared to most other states, the same for Punjab and UP are significantly higher. ICRA expects the level of debt to worsen due to the funding of the loan waivers.
At 2.5 percent of Gross State Domestic Product (GSDP), the loan waiver amount announced by the UP is the highest amongst the four states, followed by Punjab (2.1 percent of GSDP), Maharashtra (1.3 percent of GSDP) and Karnataka (0.6 percent of GSDP).
ICRA’s calculations suggest that this would push the revenue surplus estimated in the current financial year for Karnataka and UP into a revenue deficit, for the first time since FY04 and FY07 respectively. It would worsen the revenue deficits of Maharashtra and Punjab.
The worsening revenue account balances would in turn bloat the fiscal deficits of the state governments, and may lead to a breach of the fiscal deficit targets set by the Fourteenth Finance Commission. “As a result, some state governments may have to curtail productive capital expenditure, to fund a portion of the loan waiver, deteriorating the quality of expenditure,” ICRA said.
The central government, in April 2016, had approved the fiscal deficit target of 3 percent of GSDP for states for the period of 2015-20, as recommended by the Fourteenth Finance Commission.