India’s Second-Most Industrialized State Favors Debt Recast

A customer hands over a fifty rupee Indian banknote to a cashier at a restaurant in Ooty, Tamil Nadu. (Photographer: Dhiraj Singh/Bloomberg)

India’s Second-Most Industrialized State Favors Debt Recast

Tamil Nadu, India’s second largest state by output, is favoring a debt recast to ease its financial burden at a time when the pandemic is forcing states to borrow even more to fund widening budget deficits.

“We need a one-time restructuring of our debt because the interest burden has become so high,” Palanivel Thiaga Rajan said in an interview to Bloomberg TV Friday. “My concern is about fixing the structural problem so that we don’t have this vicious cycle.”

India’s Second-Most Industrialized State Favors Debt Recast

The maturity profile of states’ debt suggest that redemption pressure is likely to double from 2026 onwards, the Reserve Bank of India said in its annual review of state finances. It implies borrowings by provinces might soar in the coming years and could lead to crowding out of the private sector in a market already cramped by issuances by the federal government and state-run enterprises.

The states’ inflated debt sale schedule alludes to that possibility. They are scheduled to borrow as much as 1.78 trillion rupees ($25 billion) from the market in the April-June quarter, higher than the 1.27 trillion rupees indicated in the year-ago period.

Outstanding debt, mainly made up of market borrowings, was expected to have reached 75% of gross domestic product by end-March 2021. It was 72% in end March 2016, according to the RBI.

Tamil Nadu, which is India’s second most industrialized state and accounts for about 9% of the national output, will table a new budget focusing on demand revival in the coming months, Rajan said.

©2021 Bloomberg L.P.

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