Even as the Centre has contained its fiscal deficit at 3.2 per cent for financial year 2018 (FY-18), the states are looking the other way and their gross market borrowings next financial year are estimated to jump by nearly 22 per cent to Rs 4.5 lakh crore, says a report by ratings agency Icra.
The massive rise in market borrowings by the states is due to their higher fiscal deficits, higher repayment burden, exclusion from the national small savings fund (NSSF), higher salary outgo arising from the seventh pay commission awards and demonetisation's impact on their revenues, according to Icra.
"Gross market borrowings by the states are likely to rise from Rs 3.7 lakh crore in FY-17 to Rs 4.5 lakh crore in FY-18, which would exert an upward pressure on yields of state development loans (SDL) in FY-18," warned Jayanta Roy, group head for corporate sector ratings at the agency.
But if the states' net borrowings remain unchanged at 2.2 per cent of GDP, and assuming that the nominal GDP grows by 11.2 per cent in FY-18, Icra expects net borrowings by the states to jump to Rs 3.8 lakh crore from Rs 3.4 lakh crore in FY-17, he said.
But the SDL redemptions are set to more than double to Rs 70,000 crore in FY-18 from Rs 30,000 crore in FY-17. Accordingly, the states' gross market borrowings will rise by nearly 22 per cent to Rs 4.5 lakh crore in FY-18 from Rs 3.7 lakh crore in FY-17, he said.
Roy attributed the likely massive spike in states' fiscal deficits to the seventh pay panel award, servicing cost of the Uday bonds, rise in debt repayment from next financial year onwards and exclusion of most states from investing in NSSF since last April.
"The rise in borrowings of the states would exert an upward pressure on SDL yields in FY-18. Factors such as sluggish capex 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 as they offer higher interest rates than the G-secs," Roy said.
The rising supply of SDLs might constrain the space for the private sector to access better-priced funds from the bond markets, he warned.