Farm support measures to increase fiscal deficit

Competitive populism in the form of farm loan waivers and other schemes ahead of the general polls would inflate cumulative fiscal deficit of states, a report by India Ratings and Research (Ind-Ra) has pointed out.

In its report, the Fitch group company has maintained a stable outlook on the finances of Indian states for 2019-20.

The agency expects the aggregate fiscal deficit of states to come in higher at 3.2 per cent in 2019-20 than its forecast of 2.8 per cent in the 2018-19 Mid-Year Outlook.

"Although this is higher than the fiscally prudent level of 3 per cent of the gross domestic product (GDP), Ind-Ra believes this will not pose a significant upside risk to states’ aggregate debt burden in 2019-20," the report said.

Ind-Ra expects states’ revenue account on aggregate to clock a deficit of 0.5 per cent of GDP in 2019-20 due to higher growth in revenue expenditure than in revenue receipts.

"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 2019-20," the report said.

The report said the announcement of farm loan waivers by the governments of Madhya Pradesh, Chhattisgarh, Assam and Rajasthan in December 2018 extends the list of states that have resorted to this mechanism to address farmers’ distress.

Additionally, Odisha and Jharkhand announced schemes to provide financial assistance to small and marginal farmers along the lines of the Rythu Bandhu Scheme implemented in Telangana, it said.

Ind-Ra estimates the gross market borrowings of states to be Rs 5.7 trillion (lakh crore) in 2019-20.

The aggregate gross market borrowings by states would be in the range of Rs 5.01 trillion-Rs 5.13 trillion in 2018-19, higher than the states’ budgeted gross market borrowings of Rs 4.4 trillion for 2018-19.