Gross market borrowings of state governments estimated to rise by nearly 22 pct to Rs. 4.5 trillion in FY2018, says ICRA

Credit rating agency ICRA on Friday estimated that the gross market borrowings of the state governments is supposed to rise from Rs. 3.7 trillion in FY2017 to Rs. 4.5 trillion in FY2018, which would exert an upward pressure on state development loans (SDL) yields in FY2018.

"ICRA estimates the State Government's gross market borrowings to increase to Rs. 4.5 trillion in FY2018 from Rs. 3.7 trillion in FY2017, on the expectation of rising fiscal deficits led by the pay revision and servicing of the UDAY debt, a spike in debt repayment from FY2018 onwards and the exclusion of most state governments from investing in the National Small Savings Fund (NSSF) from April 1, 2016," said Group Head Corporate Sector Rating ICRA, Jayanta Roy.

"The rise in borrowings of state governments would exert an upward pressure on SDL yields in FY2018. Factors such as sluggish capital spending 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," added Roy.

The gross market borrowing of all state governments (including the Union Territory of Puducherry) through SDLs in FY2017, have increased by a sharp 27.1 percent to Rs. 3.2 trillion (till February 14, 2017) from Rs. 2.5 trillion in the corresponding period of the last fiscal, and already exceeded the Rs. 2.9 trillion raised during April 2015-March 2016.

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 percent of gross state domestic product (GSDP), above the anchor of 3.0 percent of GSDP, based on the recommendations of the Fourteenth Finance Commission. Most state governments have also been excluded from financing their fiscal deficits from the NSSF from the current fiscal, boosting their reliance on the bond markets.

ICRA expects the state governments to raise additional SDLs of Rs. 0.5 trillion in the remainder of this fiscal, taking their gross market borrowings for FY2017 to Rs. 3.7 trillion. Net of the repayments of Rs. 0.3 trillion due in FY2017, the state governments would add Rs. 3.4 trillion to their stock of SDL, which is equivalent to 2.2 percent of GDP, and a significant 30.4 percent higher than the net SDL of Rs. 2.6 trillion raised in FY2016.

There have been various factors, including pay revision and servicing of UDAY bonds, are expected to increase the combined fiscal deficit of the states in absolute terms in FY2018. If the states' net borrowings remain unchanged at 2.2 percent of GDP, and assuming that the nominal GDP grows by 11.2 percent in FY2018, ICRA expects the net borrowings of the state governments to rise to Rs. 3.8 trillion in that year from Rs. 3.4 trillion in FY2017.

Moreover, the redemption of SDLs is set to undergo a substantial spike, to Rs. 0.7 trillion in FY2018 from Rs. 0.3 trillion in FY2017. Accordingly, ICRA estimates the states' gross market borrowings to rise by nearly 22 percent to Rs. 4.5 trillion in FY2018 from Rs. 3.7 trillion in FY2017.