Icra: Punjab fiscal position too weak for farm loan waiver

Ratings agency Icra sees Punjab facing difficulties on the fiscal front to deliver the Rs 10,000-crore farm loan waiver, while Karnataka, Maharashtra and Uttar Pradesh appear better placed to pull off similar write-offs announced by them.
These announcements will lead to higher borrowing by the states, the agency said today, estimating fresh state development loans (SDLs) to increase to Rs 5 trillion in FY18 from Rs 3.8 trillion in FY17.
"Punjab lacks the fiscal space to accommodate the full funding of the loan waiver in FY18, with its fiscal deficit budgeted at a high 5 percent of gross state domestic product (GSDP), well above the anchor of 3 per cent," it said.

The agency, however, clarified that the view is based on the worst case scenario assuming all the states decide to fund the entire loan waiver in FY18 itself and that the exact contours of the respective packages are not yet known.
For Uttar Pradesh, which has announced a Rs 36,000- crore package, it says the state will have to cut its budgeted capital expenditure by 70 per cent even after utilising its additional space of 0.25 per cent of GSDP.
In Maharashtra, fiscal deficit is estimated to be within the 3 per cent cap without having to cut the capital expenditure. It said reports of Maharashtra's inability to fund the Rs 34,000-crore waiver emanates from other spending that is not fully budgeted such as higher compensation to local bodies for octroi losses post-GST, or the pay revision for government employees.

The agency seemed to suggest that Karnataka is the best placed to deliver on its Rs 8,200 crore farm loan waiver announcement.

"Benefiting from its estimated eligibility to avail additional borrowings of up to 0.5 per cent of GSDP in FY18, Karnataka appears to have the fiscal space to fully fund the crop loan waiver in FY18, without curtailing the budgeted capital expenditure."
The rise in SDLs would firm up their yields and widen their spread relative to G-secs to above 1 percentage point during H2 of FY18 from the present 0.70 per cent, it said.
"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," it said.