With states likely to tap the markets to raise funds to finance farm debt waivers, finance minister Arun Jaitley on Tuesday cautioned the fiscal deficit of states may rise this year. The gross market borrowings of the state governments could rise by 22% from Rs 3.7 lakh crore in FY17 to Rs 4.5 lakh crore in FY18, which would exert an upward pressure on state development loans yields, Icra said in a report. The Lok Sabha on Tuesday gave its nod to the first batch of supplementary demand for grants for FY18 for gross additional spending of Rs 11,166 crore including net cash outgo of Rs 10,379 crore. Meanwhile, replying to the debate on the supplementary demand for grants, Jaitley said that the switch-over to the goods and services tax (GST) has been reasonably smooth. The GST Council, which is expected to meet next on August 5, will soon finalise the entire mechanism of the Anti-profiteering Authority.
Following reports of farm distress, several states including Maharashtra and Uttar Pradesh have announced loan waivers. Maharashtra has announced farm loan waivers of about Rs 35,000 crore or 1.38% of its GDP, taking the fiscal deficit of the state to 2.91% as against the Budget estimate of 1.53% for FY18. Uttar Pradesh has proposed to write off loans of about Rs 36,000 crore or 2% of its GDP. However, UP has said it won’t issue bonds to finance the loan waiver, following reservations expressed by the Centre. The concerns about rising fiscal deficit of states may have been a tad exaggerated as the deficit in most years has been below the budgeted target, according to a Credit Suisse report. States’ combined fiscal deficit (excluding UDAY bonds) has been budgeted at 2.5% of their GDP for the current fiscal, against 2.7% (RE) in 2016-17, it said. Farm loan waivers likely adding just another 20 basis points to the deficit in 2017-18, considering that the entire waiver process takes a few years to complete, so impact is staggered.
Besides farm loan waiver, the increase in states’ gross market borrowings is on the expectation of rising fiscal deficits led by the pay revision and servicing of the UDAY debt, a spike in debt repayment from FY18 onwards and the exclusion of most state governments from investment of the National Small Savings Fund (NSSF) from April 1, 2016. On demonetisation, Jaitley said the Reserve Bank of India will make a public declaration of the amount of demonetised money that flowed back to the banking system and also the extent of fake currency that was detected through the exercise.