States' market borrowings set to rise 22% in FY2018

Even as the Centre has contained its fiscal deficit at 3.2% for FY18, the states are looking the other way and their gross market borrowings next financial year are estimated to jump by nearly 22% to Rs 4.5 lakh crore, says a report by rating agency Icra.

The massive rise in market borrowings by the states is due to their higher fiscal deficits, higher repayment burden, exclusion from the national small savings fund (NSSF), higher salary outgo arising from the seventh pay commission awards and the note-ban impact on their revenues, as per Icra.

“Gross market borrowings by the states are likely to rise from Rs 3.7 lakh crore in fiscal 2017, to Rs 4.5 lakh crore in fiscal 2018, which would exert an upward pressure on yields of state development loans (SDL) in fiscal 2018,” warns Jayanta Roy, group head for corporate sector ratings at the agency.

But if the states’ net borrowings remain unchanged at 2.2% of GDP, and assuming that the nominal GDP grows by 11.2% in fiscal 2018, Icra expects net borrowings by the states to jump to Rs 3.8 lakh crore from Rs 3.4 lakh crore in fiscal 2017, he says. But the SDL redemptions are set to more than double to Rs 0.7 lakh crore in fiscal 2018 from Rs 0.3 lakh crore in fiscal 2017. Accordingly, the states’ gross market borrowings will rise by nearly 22% to Rs 4.5 lakh crore in fiscal 2018 from Rs 3.7 lakh crore in fiscal 2017, he said.

Roy attributes the likely massive spike in states’ fiscal deficits to the seventh pay panel award, servicing cost of the Uday bonds rise in debt repayment from next financial year onwards and exclusion of most states from investing in NSSF since last April.

“The rise in borrowings of the states would exert an upward pressure on SDL yields in fiscal 2018. Factors such as sluggish capex and less attractive interest rates have contributed to subdued demand from the private sector for bank credit, which may encourage banks to invest in SDLs as they offer higher interest rates than the G-secs,” Roy said. The rising supply of SDLs may constrain the space for the private sector to access better-priced funds from the bond markets, he warned.

The gross market borrowings by all the states, including Puducherry, through SDLs in fiscal 2017 soared 27.1% to Rs 3.2 lakh crore till February 14, 2017, from Rs 2.5 Lakh crore a year ago, and have already exceeded the Rs 2.9 lakh crore raised during April 2015-March 2016.