State govts may face fiscal shocks in coming months: Deutsche Bank

Some factors include narrow 'own-source' revenue, mandate to help clear debt of state owned enterprise (SoEs) in power sector and pressure to raise wages

State governments in the country are likely to see their fiscal health weaken in the coming months with six key states, Bihar, Uttar Pradesh, West Bengal, Rajasthan, Haryana and Kerala, particularly vulnerable to potential shocks, says a Deutsche Bank report.

According to the global financial services major, factors likely to affect state finances in the period ahead include narrow 'own-source' revenue, mandate to help clear debt of state owned enterprise (SoEs) in power sector and pressure to raise wages on the back of 7th Pay Commission recommendations.

"The fiscal outlook for state finances will indeed be challenging from the next fiscal, particularly if state governments increase the wage bill of the employees' in line with past pay commission trend," Deutsche Bank said in a research note.

While there is no compulsion for state governments to follow the recommendations of the Central Pay Commission, the states have historically pushed through their own wage hikes, the report noted.

"We remain particularly concerned about the fiscal outlook of six key states namely Bihar, Uttar Pradesh, West Bengal, Rajasthan, Haryana and Kerala which in our view remain particularly vulnerable to potential fiscal shocks," it said.

UDAY aims at reviving ailing state electricity boards and operational efficiencies of power distribution companies. The scheme aims to provide a permanent resolution of past as well as potential future issues of the sector and empowers the utilities to break even in next 2-3 years.

According to the report, the UDAY scheme is likely to have an adverse impact on the deficit, debt and market borrowing profile of various state governments in the years to come.

"Our analysis of state fiscal balances indicates that Rajasthan and Uttar Pradesh, will face the highest stress in coping with the fiscal implication of the UDAY scheme, followed by Haryana, Andhra Pradesh and Madhya Pradesh, given their relatively weak fiscal position," the report noted.

The outstanding debt of power distribution companies stood at Rs 4.3 lakh crore in the financial year 2014-15.

Six states - Rajasthan, Tamil Nadu, Uttar Pradesh, Madhya Pradesh, Haryana and Andhra Pradesh - account for nearly 70 per cent of this total outstanding debt.

According to Deutsche Bank's index of fiscal health, Tamil Nadu tops the fiscal scorecard based on the FY14 fiscal data followed by Maharashtra, while Bihar fares the worst followed by Goa.

Uttar Pradesh and West Bengal continue to be fiscally challenged, while states such as Goa, Kerala and Rajasthan have seen a significant deterioration over the years.

The biggest improvement in ranking has been in case of Gujarat and Punjab, as per our calculation, while Orissa, Haryana, Rajasthan and Jharkhand have seen their ranking slip the most in FY13/14, the report added.