RBI flags States’ fiscal stress

The Reserve Bank of India (RBI) has pointed to the fiscal stress that States are facing due to several factors including farm loan waivers, and said higher borrowing by them could crowd out private investment.

In a report ‘State Finances: A Study of Budgets of 2017-18 and 2018-19,’ the central bank noted that States’ consolidated gross fiscal deficit (GFD) overshot the budget estimates in 2017-18 due to shortfalls in own tax revenues and higher revenue expenditure.

“In recent years, signs of pressures on the fiscal position of States have re-emerged,” the RBI said.

While States budgeted a gross fiscal deficit to gross domestic product (GFD-GDP) ratio of 2.7% in 2017-18, revised estimates reveal GFD-GDP ratio of 3.1%, the RBI said. “The deterioration was located in the revenue balance. In contrast, the capital account has helped to contain the GFD.”

Private investment

Since the combined GFP to GDP was at 6.4% as compared with the Fiscal Responsibility and Budget Management Committee’s (FRBM) medium-term target of 5%, there is a risk that private investment gets crowded out of the finite pool of financial resources, the report noted. “Risks are also likely to emanate from possible higher pre-election expenditure in more than 10 States and implementation of the balance pay commission awards, particularly to the extent that they are not fully provided for under the budgeted expenditure,” the RBI said. Capital expenditure may have to bear the brunt of the fiscal correction like the past two years.

While States together have projected a revenue surplus and a lower consolidated GFD of 2.6% of GDP in 2018-19, 11 States have budgeted for fiscal deficits above the threshold of 3% of GDP.

The RBI said with States continuing announcements and roll-out of farm loan waivers, the budgeted GFD could be at risk, and additional borrowing requirement could produce a concomitant impact on the already elevated borrowing yields.

Among the factors responsible for fiscal stress in certain States are farm loan waivers that have been announced since 2014, with States like Andhra Pradesh, Telengana, Tamil Nadu, Maharashtra, Punjab, Uttar Pradesh, Rajasthan and recently Karnataka announcing agriculture debt waiver schemes.

According to the report, the total debt waiver granted during 2017-18 amounted to 0.32% of GDP as per revised estimates as opposed to budget estimates of 0.27% of GDP. Total debt waivers are budgeted at 0.2% of GDP during 2018-19.

Apart from having a dampening impact on rural credit institutions, such loan waivers, the report pointed out, impact credit discipline, vitiate credit culture and dis-incentivise borrowers to repay loans, thus engendering moral hazard.

“Besides, it may not just be loan waivers that are detrimental to the government balance sheet; it is the fiscal volatility emanating from random policy shocks that can have an even more enduring impact,” it said.