The Reserve Bank of India (RBI) has cautioned that visible fiscal pressures are emerging for several State governments on the expenditure side, particularly state-specific schemes like agricultural debt waivers.
“Debt waivers can deflect the state from its fiscal consolidation path, coming as they do, on top of UDAY and the implementation of the pay commission recommendations. Farm productivity enhancement through pecuniary incentives like debt waivers is unproven,” the RBI said in a study on state finances. Total debt waivers announced by various states in the last four years amounted to Rs 169,000 crore.
States’ consolidated gross fiscal deficit (GFD) overshot the budget estimates in 2017-18 due to shortfalls in own tax revenues and higher revenue expenditure. it said. For 2018-19, states have budgeted for a correction, mainly emanating from a modest revenue surplus, the RBI study said.
For 2018-19, states have budgeted for a consolidated gross fiscal deficit of 2.6 per cent of GDP, with 11 states planning to remain above the 3 per cent threshold. “Consolidation is mainly expected to accrue from the revenue balance, which is expected to post a surplus of 0.2 per cent of GDP in FY19 (budget estimates) against a deficit of 0.4 per cent in FY18 (revised estimates),” it said.
The RBI study says higher fiscal deficits in future may not be offset by higher GDP gains. “If the waivers are not targeted efficiently, coupled with structural productivity constraints in the farm sector, the potential for these waivers contributing to inflationary pressures via higher fiscal deficits remains a key concern,” it said.
It said past experiences with loan waivers — Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS of 2008) — show that debt relief helps in reducing household debt but there appears to be no evidence of increase in investment and productivity of beneficiary households. “Farmers may tend to factor in future credit constraints and reluctance of formal institutions to lend to them following waivers, and in turn, they may tend to shift to informal sources of credit,” the RBI said.
According to the RBI study, there are visible signs of fiscal pressures emerging in several states, particularly due to certain expenditure schemes. “These schemes could be made more productive by closing ‘efficiency gaps’, better targeting/ reducing leakages and careful planning as well as better forecasting so that outgoings from the state budgets are financed through revenue resources and transfers,” it said.
On revenue, the GST implementation could pave the way for generating higher revenues through greater efficiency and broadened tax base, it said. States have, however, increased reliance on market borrowings to meet expenditures given the recurring shortfall in revenue receipts relative to budgeted targets. Market borrowings provide easy access to finance for states, but the present lack of incentives to undertake fiscal reform so as to earn lower spreads could render state finances vulnerable to debt sustainability concerns, the RBI warned.
The RBI said steadily rising yields on SDLs (state development loans) imply the need for larger and faster corrections in primary deficits than before so as to adhere to the revised FRBM target of 20 per cent for the state-level debt to GDP ratios by 2024-25. However, attaining this in a scenario of large committed expenditure could lead to compromise on the developmental and capital expenditure, which may not be desirable from a long-term growth perspective, it said.
“Hence, re-prioritising state expenditures and improving their efficiency will be necessary to sustain growth while maintaining fiscal prudence,” the RBI said.
The total debt waiver granted during 2017-18 amounted to 0.32 per cent of GDP as per revised estimates as opposed to budget estimates of 0.27 per cent of GDP. Total debt waivers are budgeted at 0.2 per cent of GDP during 2018-19.