States' debt crisis set to worsen as repayment burden looms

None of the states is in a position to pay debt out of surplus, as there is no surplus, says Icra

Starting 2017-18, the debt burden of some of the indebted states could deepen further, with the repayment schedule of market loans availed in 2007-08 kicking in.

According to the Reserve Bank of India (RBI) data, states’ total debt burden will more than double next financial year, increasing from Rs 31,820 crore in 2016-17 to about Rs 70,240 crore in 2017-18. This will further swell to Rs 1,19,900 crore in 2018-19.

A recent report by rating agency ICRA estimated that the gross market borrowing of the state governments is likely to rise from Rs 3.7 trillion in 2016-17 to Rs 4.5 trillion in 2017-18.

“One of the reasons for the high amount of borrowings would be large repayment obligation of all the states. None of the states is in a position to pay debt out of surplus, as there is no surplus. So, the repayment has to come from fresh borrowing,” said Jayanta Roy, group head — corporate sector rating, ICRA. “However, in relation to the overall GDP and revenue receipts, if the stock of debt remains within a limit, this is not alarming.”

Since 2007-08, there has been a spike in market borrowings due to various factors, including the financial crisis of 2007-08 and drying up of small savings pool. The RBI, too, has been encouraging market borrowing as it meant states pay interest rates according to their financial profile.

The burden of repayment would be particularly steep in highly indebted states — Maharashtra, Uttar Pradesh and West Bengal.

Data from the RBI suggest that in 2018-19 Maharashtra’s debt burden from market loans would more than double to about Rs 17,760 crore, against Rs 8,520 crore in 2017-18. In case of Uttar Pradesh, the rise would be nearly three-fold, as market loan repayment burden would increase from Rs 4,420 crore in 2017-18 to about Rs 12,690 crore in 2018-19.  

For West Bengal, the repayment burden on account of market loan would increase from Rs 3,200 crore in 2016-17 to about Rs 11,610 crore in 2017-18.  

“This rise in SDL issuance in the current year can be attributed to various factors, including the flexibility to some state governments to borrow an additional amount of up to 0.5 per cent of gross state domestic product (GSDP), above the anchor of three per cent of GSDP, based on the recommendations of the 14th Finance Commission,” according to the ICRA report.