Farmer takes a break from harvesting wheat at a farm in Aligarh, Uttar Pradesh, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

In Charts: Farm Loan Waivers May Destabilise State Finances, Hurt Capex

The fiscal deficit of states could come under pressure as there is a high probability of more farm loan waivers ahead of the upcoming state and general elections. That could destabilise finances and capacity expenditure, hurting growth.

That’s what India Ratings and Research said in a report. The combined fiscal deficit of the states in the years to March 2016 and 2017 was 3.07 percent and 3.66 percent, respectively, due implementation of the Ujwal DISCOM Assurance Yojana and the Seventh Central Pay Commission.

Combined capex rose 40 percent and 26.2 percent year-on-year in the last two financial years. Yet, while states made provisions to absorb the stress, farm loan waivers have increased fears of a widening fiscal deficit. The governments would most likely resort to expenditure compression, which will impact both the budgeted capex and social expenditure, India Ratings said. These cuts do not augur well for states' medium and long-term growth, it said.

Stress emanating from UDAY and wage revision so far has been absorbed adequately and with relatively little damage to state finances and their debt sustainability, the report said. That cannot be said about farm loan waivers if they continue, India Ratings said.

India Ratings explains the deficit and its implications in these charts...

Fiscal Deficit

The fiscal deficit as a percentage of gross domestic product has been on the rise since 2012 due to high public spending due to UDAY and seventh central pay commission. Combined fiscal deficit of states for for the year ending March has been budgeted at 2.7 percent of the GDP. Farm loan waivers appear to be a major hindrance to achieve the target, India Ratings said.

In Charts: Farm Loan Waivers May Destabilise State Finances, Hurt Capex
In Charts: Farm Loan Waivers May Destabilise State Finances, Hurt Capex

Farm Loan Waivers

Farm debt waivers announced by five states together are likely to widen the combined fiscal deficit of states by Rs 1.07 lakh crore or 0.65 percent of the of GDP, according to India Ratings estimates. Of these, waivers announced by Maharashtra, Karnataka and Rajasthan are outside their state budgets, forcing them to divert funds from their original capex plans.

In Charts: Farm Loan Waivers May Destabilise State Finances, Hurt Capex

Revenue Deficit

Despite these fiscal pressures, the encouraging feature of 2017-18 state budgets is near stability in the combined revenue deficit and some improvement in the combined primary deficit over the previous year, said India Ratings.

In Charts: Farm Loan Waivers May Destabilise State Finances, Hurt Capex
In Charts: Farm Loan Waivers May Destabilise State Finances, Hurt Capex

Debt To GDP

While a decline in primary deficit augurs well for debt sustainability, the combined state debt-to-GDP ratio will rise to 24.79 percent in 2018 from 23.76 percent in 2017, according to India Ratings estimates.

In Charts: Farm Loan Waivers May Destabilise State Finances, Hurt Capex

Aggregate Capex

Continued capital expenditure by states has been a key positive in the 2018 state budgets, India Ratings said. The combined capex of states grew 40 percent and 26.2 percent year-on-year in 2016 and 2017, respectively. The capex-to-GDP ratio breached the 3 percent mark in 2016, boosted by UDAY bond issuances. It’s expected to be at 3 percent next year.

In Charts: Farm Loan Waivers May Destabilise State Finances, Hurt Capex