Some Indian states have been borrowing heavily to fund everything from writing off farm loans to paying higher salaries for staff. And the interest burden is set to push them to borrow more to plug budget gaps, according to a study by HSBC Bank Plc.
Indian states clocked a combined fiscal deficit of 2.9 percent of national gross domestic product in the financial year to March 2018, HSBC said. That was the highest in at least six years, the study showed. The total shortfall, when combined with the federal government’s 3.5 percent budget gap, stood at 6.4 percent.
That will see India retain its position as the nation with the second-largest budget deficit among major economies, just behind Brazil. It is, of course, not good news for bond investors who have seen the value of their portfolios evaporate in the first few weeks of the new financial year that started in April.
“As a consequence of large deficits over the past few years, the debt repayment burden for the states is set to double,” HSBC economists led by Pranjul Bhandari wrote, adding that only a sharp reduction in the overall fiscal deficit would lower gross borrowings. “But that doesn’t appear to be easily achievable.”
Since fiscal year 2015, state borrowings have soared to finance widening deficits. As they reach maturity, they will create large debt repayment pressure — in fact, double the repayment bill from the fiscal year that started April 1, the HSBC study showed. That will keep the market’s gross borrowings elevated for the foreseeable future.
According to the central bank’s borrowing calendar, Indian states plan to raise as much as 1.28 trillion rupees in the first quarter — double of what was raised in the same period last year.
HSBC said the slippages for states were on the expenditure side, which rose by 0.45 percent of GDP compared with their budget estimates. That was led by a higher-than-expected bill for salaries and pensions, more outgoings due to farm-loan waivers, and rising interest burden after the steep increase in the issuance of state government bonds.