Farm loan waivers to raise states' fiscal deficit: India Ratings

New Delhi (IANS) Farm loan waivers and other schemes declared by states will raise their aggregate fiscal deficit next year but will not pose a major risk to their total debt burden, India Ratings and Research (Ind-Ra) said in a report.

"The agency expects the aggregate fiscal deficit of states to come in higher at 3.2 percent in FY20 than the agency's forecast of 2.8 percent in the FY19 mid-year outlook.

"Although this is higher than the fiscally prudent level of 3 percent of gross domestic product (GDP), Ind-Ra believes this will not pose a significant upside risk to states' aggregate debt burden in FY20," the report said.

Further, Ind-Ra has maintained a stable outlook on the finances of the states for 2019-20.

States' revenue account on aggregate is likely to clock a deficit of 0.5 percent of GDP in 2019-20 due to a higher growth in revenue expenditures than revenue receipts, it said. 

"The competitive populism, in the nature of farm loan waivers and other financial support schemes, would take centre stage in the run-up to next general elections in May 2019. 

"A larger impact is expected on fiscal and revenue deficit to gross state domestic product ratios for Madhya Pradesh, Kerala and Rajasthan, among non-special category states, in FY20," it added.

As per the report, states' total revenue expenditure is likely to grow 18.9 percent year-on-year (yoy) to Rs 33,280.90 in FY20 from 11.2 percent in current fiscal. 

Madhya Pradesh, Chhattisgarh, Assam and Rajasthan have announced farm loan waivers in December 2018 to address farmers' distress. Odisha and Jharkhand too have announced schemes similar to Rythu Bandhu scheme in Telangana for small and marginal farmers.

The casualty of farm loan waivers would be the capital expenditure as capex is a soft target for deficit control during periods of fiscal adjustment, the rating agency said.

"Ind-Ra expects states' aggregate capex/GDP to come in marginally lower at 3 percent in FY20 from the budget estimate of 3.07 percent for FY19," it said.

The agency believes capex to GDP ratio could come in below 3 percent for Tamil Nadu, Haryana, West Bengal and Kerala in 2019-20.

Ind-Ra expects the aggregate debt/GDP to rise to 25.1 percent in FY20 from the budgeted 24.3 percent for FY19. 

"The agency does not view the increase to be detrimental to states' debt sustainability position, although states would channelise some part of borrowings towards meeting revenue expenditure," the report observed. 

In Ind-Ra's opinion, Madhya Pradesh, Tamil Nadu and Kerala are most susceptible to clock an increase in the debt burden in FY20.

Ind-Ra estimates the gross market borrowings of states to be Rs 5.7 trillion in FY20 and in the range of Rs 5.01 trillion-5.13 trillion in FY19, which is higher than the states' budgeted gross market borrowings of Rs 4.4 trillion for FY19.