India?s fiscal numbers could be far worse than projected for this fiscal. State governments have asked the Reserve Bank of India (RBI) for permission to raise their borrowing limit for the fiscal to about R2 lakh crore. The limit will be a near-50% jump in net borrowings by the states, putting additional pressure on credit that banks can make available for the rest of the economy.
The borrowing target does not factor in the R70,000 crore additional liability states can expect to face from their electricity boards for 2010-11, in the same way as the full extent of the Centre?s subsidy bill is not reflected in its Budget estimates. Under the 13th Finance Commission award, states have the headroom to borrow from the market up to 3.5% of their state domestic product, measured at current prices. Since there is a time lag in state GDP numbers, the earlier borrowing target for the fiscal was about R1.30 lakh crore (gross, as per bank estimates) based on growth projections for 2010-11.
But the sustained rise in inflation nearing double digits has altered those numbers. For instance, the Finance Commission had projected high-performing states like Gujarat and Haryana to grow at 13.95% and 13.91% in 2010-11. But numbers reaching respective state treasuries peg growth at close to 19% for some of these provinces. For 2010-11, the aggregate growth rate for all states was estimated at 12.5% while the final figure is 20.3%.
This gap has created additional room for the states to borrow. In addition, the National Small Savings Fund, from which states have to borrow compulsorily before they can approach markets, is drying up. It shows a negative balance of R2,584 crore at the end of June 2011, against a net accrual of R13,249 crore at the same time last year. Since bank deposit rates for every category of savings instruments are now high, the NSSF will likely stay crippled for the rest of this fiscal.
This gap in NSSF has also been factored in by the states in their projections to RBI. The states can borrow to the extent of shortfall from the Fund. The projections by states have come when the Centre is struggling to balance its own borrowing within the R3,43,000 crore budgeted for this fiscal.
According to RBI?s latest financial stability report, it will be impossible to contain petroleum and fertiliser subsidy within the budget limits this fiscal, as the price of crude is above the $80 a barrel the finance ministry has projected to rule for most of this fiscal. This means higher borrowing. The combined effect of the twin borrowings could push the combined fiscal deficit of the Centre and states beyond 7.3 % of GDP for 2011-12, the ceiling set by the Finance Commission.
Even within the current numbers, the Centre expects to hit 4.6% this year, leaving a headroom of just 2.7% for the states. States borrow from the market through a 10-year paper which is SLR grade, which makes it highly
attractive for banks and other financial institutions. At present, though banks are flush with the same quality of paper, the RBI is likely to nudge them to subscribe more from the issues.
Saugata Bhattacharya, senior vice-president, Axis Bank said he was surprised. ?State borrowings so far have not spurted. But a rise of this nature will make the yields on their paper move,? he said. In the R2 lakh crore borrowing plan, the netting-out is limited as repayments of state loans are very thin. States began borrowing somewhat aggressively from markets only from 2004-05; so the maturity profile of their loans is still benign.
