Since coming to power, the National Democratic Alliance government has committed itself to fiscal prudence by bringing the fiscal deficit down from 4.1 per cent of gross domestic product (GDP) in FY15 to a target of 3.2 per cent in FY18. But, state governments have gone the other way.
After declining from a peak of 3.01 per cent of GDP in 2009-10, state fiscal deficits now seem to be inching up. As a consequence, the decline in general government deficits as seen in Chart 1 is largely because of the Centre reining in its deficits.
The situation is unlikely to change in FY18. While states have budgeted to bring down the fiscal deficit to 2.6 per cent of GDP in FY18 from 2.8 per cent in 2016-17 (RE), a report by HSBC Global Research suggests these could rise by 0.2 per cent of GDP (Chart 2), driven by salary revisions after the 7th Pay Commission.
Rising deficits have pushed states to rely more on market borrowing. As seen in Chart 3, states’ market borrowings rose by a staggering 30 per cent in FY17. Including the Ujwal DISCOM Assurance Yojana, state borrowings rose from 1.9 per cent of GDP in FY15 to 3.4 per cent in FY17, as seen in Chart 4. By comparison, over the same period, the Centre’s borrowings have declined from 4.7 per cent of GDP to 3.9 per cent.
Higher borrowings have pushed up bond yields. As shown in Chart 5, the spread between state development loans and government securities has widened to 80 basis points, 30 bps higher than its long-term average.
Despite varying fiscal health and some states, especially those under UDAY, having greater borrowing requirements, there still isn’t much difference in yields across states as seen in Chart 6.
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