Farm loan waivers announced by several states will push up borrowings by at least Rs 1,50,000 crore and raise the cost of funds for states, rating agencies have said. Full funding of announced crop loan waivers through state development loans (SDL) could push up fresh issuance to Rs 5,30,000 crore in FY18 from Rs 3,80,000 crore in FY17.
It is unclear whether the loan waivers would be funded through issuance of State Development Loans (SDL) or other modes of financing, such as loans from banks to the state governments or bonds issued by the latter to the banks. If the funding of the announced waivers of Rs 88,170 crore is done entirely through SDL in FY2018 (which is unlikely), the issuance of fresh SDL could rise to Rs 5,30,000 crore in FY18, from our initial baseline estimate of Rs 4,50,000 crore, and the issuance of Rs 3,80,000 crore in FY17. However, since all four states would not have the borrowing space to fund the entire waiver in FY18, fresh SDL issuance is unlikely to exceed Rs 5,00,000 crore, ICRA has said.
The rise in SDL issuance would firm up their yields and widen their spread relative to Central Government securities (G-sec) to above 100 bps during H2 FY2018, from around 70 bps at present. In addition, the expected increase in SDL issuance is likely to contribute to crowding out the private sector from accessing the bond markets at competitive rates, even though liquidity conditions are likely to remain benign during most of the current fiscal, ICRA said.
Since April 2017, Uttar Pradesh, Maharashtra, Punjab and Karnataka have announced crop loan waivers worth around Rs 36,000 crore, Rs 34,000 crore, Rs 10,000 crore and Rs 8,200 crore, respectively, ICRA said in a report. There’s question mark on if these states have the fiscal space to fund the loan waivers in FY18 itself, based on their FY18 budget estimates (BE).
“The limited information available in the public domain in the Government of Punjab’s (GoP’s) budget speech for FY2018 suggests that the Punjab government lacks the fiscal space to accommodate the full funding of the loan waiver in FY18, with its fiscal deficit budgeted at a high 5.0 per cent of gross state domestic product…” ICRA said.
If UP is to account for the full amount of the loan waiver in FY18, it would have to curtail its budgeted capital expenditure by more than 70 per cent, despite utilising the additional borrowing space of 0.25 per cent of GSDP above the anchor of 3.0 per cent of GSDP, unless it resorts to measures such as liquidating its investments in treasury bills, it said.
Benefitting from its estimated eligibility to avail additional borrowings of up to 0.5 per cent of GSDP in FY18, the Karnataka government appears to have the fiscal space to fully fund the crop loan waiver in FY18, without curtailing the budgeted capital expenditure.
The government of Maharashtra’s (GoM’s) fiscal deficit is likely to remain within the cap of 3 per cent of GSDP in FY2018 even after accounting the entire crop loan waiver in that year, without needing to curtail the budgeted capital spending. However, reports suggest that the state government may lack the space to raise borrowings to fund the entire loan waiver of Rs 34,000 crore in FY18, which may be on account of other spending that is not fully budgeted, such as higher compensation to local bodies or pay revision, ICRA said.