The Centre should allow states, most of which are facing revenue constraints post-pandemic, to have a larger fiscal deficits in order to enable them to clear a large part of their rising off-budget liabilities, analysts have said.
While the Centre has fully discontinued funding of projects and schemes through extra budgetary resources (EBR) in FY23, many states with high off-budget liabilities were reluctant to take similar steps due to revenue constraints.
According to a study by Crisil Ratings, off-balance-sheet borrowings by state governments may have reached a decade-high of about 4.5% of GSDP, or about Rs 7.9 trillion in FY22.
The Centre has brought into its balance sheet off-budget liabilities worth about Rs 3.7 trillion on government schemes such as food subsidy, fertiliser subsidy, housing and drinking water during the pandemic years FY21-FY22 when the rating agencies were more tolerant to a widening of fiscal deficits. Some residual off-budget liabilities remain on housing and drinking water schemes among others, which will be cleared in due course, a senior central government official said. It has also stopped fresh borrowing by some semi-commercial entities such as NHAI, MTNL and BSNL from FY23 by providing more budgetary support.
To accommodate these course corrections, the Centre has allowed itself a fiscal deficit of a record 9.2% of GDP in FY21, 6.7% in FY22 and aims to bring it down to 4.5% by FY26, way beyond the prudential limit of 3%. The Centre allowed a maximum fiscal deficit of 5% of GSDP in FY21 and 4.5% in FY22 with a rider that 75 bps in each were tied to reforms. It is set at 4% of GSDP with 50 bps linked to power sector reforms to nursing back power distribution firms into health.
The Centre is rightly trying to tell the states that they should also stop borrowing off-budget and manage their affairs within fiscal deficit ceilings, former economic affairs secretary Subhash Chandra Garg said. However, that is where a little bit of problem lies since the states don’t have the luxury of high fiscal deficit like the Centre and hence get constrained, he said. “Therefore, to my mind, the government of India should take this logically forward that as long as the government of India runs a high fiscal deficit, they should allow the states also have higher fiscal deficit and control or eliminate the off-budget borrowings,” Garg said.
The action by the Centre to bring transparency in its budget gave it moral authority to finally clamp down on off-budget liabilities being accumulated unhinged by many states.
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So, the Centre tightened the mandatory borrowing approval for many states to tap the market for issuing their state development loan papers by enforcing a rule from FY23 that all off-budget liabilities would be counted as part of their annual net borrowing ceilings (NBC).
It struck off at least 25 basis points (bps) from the 3.5% of gross state domestic product (GSDP) of these states in FY23. Accordingly, it cut Rs 41,000 crore or 62% of the total off-budget liabilities of states in FY22 from their net borrowing ceiling for FY23, in a move that would impact eight states including Telengana, Andhra Pradesh and Kerala.
Kerala had opposed the Centre’s move to include loans of Kerala Infrastructure Investment Fund Board (KIFB) in the NBC of the state, reducing funds available for the state budget. KIFB, a body corporate supported by the government, has been an effective tool to find resources for capital expenditure for the sate incurring high revenue deficits.
The Centre has also an unfinished agenda on this front such as extra-budgetary resources are being raised by the Indian Railways Finance Corporation for railways projects, but analysts feel these are not urgent issues as these semi-commercial entities have also own revenue generating capacities and budgetary allocations for railways has also gone up significantly. While NHAI has debt liabilities of Rs 3.49 trillion by the end-FY22, IRFC has provided about Rs 4 trillion in funding to the railways’ sector.
Unlike the Centre the revenue-generating capacity of most states is constrained, reducing their wherewithal to directly fund the entities they own. As the state-run entities are working to build social infrastructure and fund social welfare schemes of their governments, their cash flows are also limited.
“While this is a good decision to have a handle on state borrowings from the point of view of fund demand. However, if it translates in states compressing social sector expenditure and capex it will not only have an impact on states’ growth rate and fiscal position but on achievement of social outcomes,” India Ratings chief economist DK Pant.
According to N R Bhanumurthy, Vice-Chancellor of Bengaluru’s BASE University, states have to follow what the Centre is doing for the betterment of their state fiscal conditions. “Transparency always leads to better outcomes. The Centre has already created some kind of incentive structure by giving the option to states to carry out certain reforms to get additional borrowing window,” Bhanumurthy said.
The Centre’s ballooning deficit in FY21 pushed its debt-to-GDP to also reach a 14-year high of about 59% (as against the prudential level of 40%) in FY21 and will likely be over 55% in FY22. The aggregate debt of states reached a 15-year high of 31% of GDP (the prudential level at 20%) in FY21 and is seen to be a little lower than that in FY22 as improved revenues helped them curb borrowings.