Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

Why Credit Suisse Thinks State Fiscal Worries Are Overblown

Indian states may end up borrowing a lower amount in fiscal 2018 than earlier anticipated, according to state government borrowing plans released by the Reserve Bank of India. That suggests concerns around weak state finances were “overblown”, Credit Suisse said in a research report.

States governments are expected to borrow an additional Rs 1.28-1.38 lakh crore in the final quarter of financial year 2018, according to RBI’s state development loans’ borrowing calendar. That would take their total borrowing in the ongoing fiscal to Rs 4.1 lakh crore – 8 percent higher than last year, and 4 basis points lower as a percentage of the gross domestic product, Credit Suisse noted. This is also slightly lower than the consensus Rs 4.5 lakh crore that states were expected to borrow in FY18.

The “benign” state borrowing calendar fails to justify the “consensus fears of weak state fiscal”, Credit Suisse said.

The fiscal deficit-to-GDP ratio for Indian states in 2015-16 had soared to a twelve year high due to higher capital expenditure, according to the latest available data. An RBI study of state finances in May last year showed that the combined fiscal deficit of states in FY16 had increased to 3.6 percent of the GDP, highest since 2003-04 when the figure was at 4.2 percent.

Bond traders BloombergQuint spoke to said states may have cut back their capital expenditure and social spending which may have resulted in the lower borrowing. However, that’s unlikely to have a material impact on yields of government securities, they added.

The report comes amid concerns of a fiscal slippage at the Centre. The central government has already said that it will borrow an additional Rs 50,000 crore from the market this year to finance its deficit.

However, Credit Suisse’s India equity strategist Neelkanth Mishra said the lower state borrowing may offset some of the “negative surprises” from the higher-than-budgeted bond issuances by the Centre. The sum of aggregate bond sales by the Centre and net bond sales by the states would still be 3 basis points lower than last year as a percentage of GDP, the report added.

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