Raising concern that state government finances may be disrupted due to farm loan waivers, economists at the finance ministry have said the implementation of such waivers by states should be within the prescribed prudent fiscal limits to ensure the debt sustainability of the general government is not compromised.
If states assume higher debt to finance farm debt waivers, they would in many cases need to cut other spending or increase taxes, the economists said in the volume two of Economic Survey 2016-17.
The combined outstanding liabilities of the Centre and states, which was at 70.6% in FY10, came at 69.3% in FY16 and estimated at 68.6% in FY17. Outstanding liabilities of states is estimated at 23.9% in FY17, up from 23.4% in FY16.
The NK Singh-led Fiscal Responsibility and Budget Management (FRBM) Committee has recently recommended a ceiling for general government debt (both centre and states) of 60% of GDP by 2022-23. And within this overall limit, a ceiling of 40% should be adopted for the Centre, and 20% for the states.The Centre’s debt-to-GDP ratio was 49.4% in FY17. Net of UDAY bonds, issued by states to bail out debt-trapped power distribution companies, consolidated state fiscal deficit moderates by 0.7 percentage point to 2.9% in FY16. Thus with UDAY, as per the available information, the combined fiscal deficit of States crossed the FRBM benchmark of 3%. Based on information on 25 states, the combined fiscal deficit of states in 2016-17 (RE) would be 3.4% after including the UDAY liabilities while it would be 2.7% without the UDAY liabilities.
Demands for farm loan waivers have emerged at a time when state finances have been deteriorating. The UDAY scheme has led to rising net market borrowings by the states, expected soon to overtake central government borrowings in FY18. As a result, spreads on state government bonds relative to G-Secs have steadily risen by about 60 basis points. It is estimated that loan waivers at the all-India level could be between Rs 2.2-2.7 lakh crore. Following a nudge from the Centre, Uttar Pradesh, which does not have fiscal space, has slashed capital expenditure by 13% (excluding UDAY) to accommodate the farm loan waiver, instead of borrowing from market.
Besides farm loan waivers, absorption of the discom liabilities under the UDAY programme stressed states’ finances. The state Budgets expanded considerably in FY16, both on account of increase in current and capital spending. The capital expenditure of the states increased by 56.1% in 2015-16, but net of UDAY, this growth was only about 23%.
UDAY-related borrowings raised by the states have been exempted from the fiscal deficit targets during 2015-16 and 2016-17. While this could be the case with individual states, it would be important to understand the combined fiscal deficit of all states including the UDAY liabilities, as these liabilities add to the debt of the states. There was an uptick in state fiscal deficit during FY14 and FY15 without any worsening of the combined debt position of the states, relative to the GDP. But in FY16, the liabilities to GDP ratio of states steeply rose owing to the combined effect of a considerable increase in deficits and the reduction in nominal GDP growth.