Any slippage could see India’s overall public finances come under pressure and raise the risk of a downgrade by rating companies.
The growth slowdown means weaker revenue for states, especially collections from GST
India’s sharp slowdown is endangering the fiscal deficit targets of its states, threatening to unravel progress made over the past few years and driving borrowing costs higher for some of them.
The states have budgeted a consolidated fiscal deficit target of 2.6 per cent of gross domestic product in the financial year ending March, a recent study by the Reserve Bank of India shows. While the deficit ratio has remained within the mandated threshold of 3 per cent of GDP in the previous two years, doubts are growing about their ability to meet the latest goal.
Any slippage could see India’s overall public finances come under pressure and raise the risk of a downgrade by rating companies. Only last month, Moody’s Investors Service cut the nation’s credit rating outlook to negative, citing a litany of problems from a worsening shadow banking crunch and a prolonged slowdown in the economy to rising public debt.
Outstanding debt of states has risen over the last five years to 25 per cent of GDP, posing medium-term challenges to its sustainability, according to the RBI study. India’s gross general government debt — including central and states’ borrowings — stood at 69 per cent of GDP, higher than China’s 55.6 per cent, according to the International Monetary Fund.
That spells bad news for states’ borrowing costs. The yield on 10-year bonds sold by West Bengal, which has one of the lowest deficit ratios among India’s 28 states, rose to 7.29 per cent in December from 7.06 per cent in July, data compiled by Bloomberg News show. That’s still lower than the 8.21 per cent at the beginning of the year, as yields tracked the RBI’s aggressive interest rate cuts.
Despite attractive yields on states’ debt that carry an implicit sovereign guarantee, there’s little interest from global funds — which have used only 2.2 per cent of the Rs 61,200-crore ($8.6 billion) investment limit available to them in such notes. Part of the reason, according to fund managers, is a lack of price differentiation between the better-run and poorer states.
West Bengal is joined by states such as Gujarat and Maharashtra that have managed to keep their fiscal deficits at less than 3 per cent of GDP. But they all pay a coupon similar to that of, or greater than some of their financially weaker peers. Take Rajasthan: the state had an average gross fiscal deficit of 5.4 per cent between financial years 2016 and 2019, but sold 10-year bonds this month at a yield of 7.18 per cent.
States haven’t had a problem attracting local investors with yields that are typically higher than those on notes issued by the central government.
