Farm Support To Raise States’ Fiscal Deficit, Says India Ratings

Farm loan waivers and income support schemes announced by several states is estimated to result in a higher aggregate fiscal deficit in the next financial year but won’t pose a significant risk to their total debt burden, according to India Ratings.

The states’ aggregate fiscal deficit is estimated at 3.2 percent of the gross domestic product in financial year 2019-20, higher than the 2.8 percent estimate in FY19, the ratings agency, which retained a stable outlook on state finances, said in a research note.

The total revenue expenditure will grow 18.9 percent annually to Rs 33.28 lakh crore in FY20 from 18.9 percent forecasted in FY19. The estimated rise will be on account of a deficit of 0.5 percent of GDP in the aggregate revenue account of all states in FY20 because of higher growth in revenue expenditure from farm loan waivers and other financial support schemes in the run up to general election, it said.

States such as Madhya Pradesh, Chhattisgarh, Assam and Rajasthan announced farm loan waivers in December. Also, Odisha and Jharkhand plans to provide financial assistance to small and marginal farmers, similar to the Rythu Bandhu Scheme in Telangana.

The ratings agency maintained a stable outlook as the aggregate debt-to-GDP ratio is expected to rise marginally to 25.1 percent in FY20 from the budgeted 24.3 percent for FY19. Madhya Pradesh, Tamil Nadu and Kerala are the most susceptible to report an increase in debt burden, the report said.

But the rise in revenue expenditure is likely to be offset by a reduction in capital expenditure. India Ratings expects the total capex-to-GDP ratio to decline to 3 percent in FY20 compared with a budget estimate of 3.07 percent for FY19. For some states, including Tamil Nadu, Haryana, West Bengal and Kerala, this ratio may fall below 3 percent.

The states will channelise some of their borrowings to meet the higher revenue expenditure, it said. Their gross market borrowing is estimated to be Rs 5.7 lakh crore in the next financial year compared with Rs 5.01-5.13 lakh crore forecasted in FY19. Aggregate net borrowing for the states will be Rs 3.8 lakh crore for 2018-19, said Devendra Pant, chief economist at India Ratings.