The Reserve Bank of India (RBI) has warned that fiscal ri­sks from several states goi­ng to polls in 2018-19 could only add to the pressure on the banking system due to farm loan exemptions.

“With regard to the fiscal position of states, budget estimates for 2018-19 have envisaged a revenue surplus and a lower fiscal deficit. In the year, however, fiscal risks may emanate from many st­a­tes going for elections, the ad­ditional burden of farm lo­an waivers announced outside budgeted outlays and the implementation of pay/ pe­n­sion/allowances revisio­ns,” RBI said.

Assembly elections will be held in Madhya Pradesh, Chhattisgarh, Mizoram and Rajasthan this year. Karnataka, UP, Maharashtra and Punjab have announced massive loan wai­vers costing states from Rs 8000 crore to Rs 30,000 crore.

While waivers may clean­se banks’ balance sheets in the short-term, they may dis -incentivise banks from len­d­ing to farmers in long-term.

RBI fears that spending ahead of the upcoming state elections may derail its fiscal consolidation attempts. Co­ntinuing farm loan waiver announcements as well as implementation of the pay commission awards by some states are risks that RBI flagged off in the report.

Revenue mobilisation remains the key to attaining the budgeted targets. The cushion provided by compensation cess by the Centre for any interim shortfall in goods and services tax revenue could help smooth sta­te finances on the revenue front. Against this backdrop, the combined gross fiscal deficit of the Centre and the states is budgeted to be brought down to 5.9 per cent of the gross domestic product (GDP) in 2018-19 from 6.6 per cent in the revised estimates for 2017-18, the report said.

Fiscal pressures across st­ates are already elevated wi­th states breaching the 3 per cent threshold set under the Fiscal Responsibility and Bu­dget Management Act for the third consecutive year in 2017-18. Farm debt waivers announced by 5 large states is expected to widen their fiscal deficit by Rs 1,07,700 crore (0.65 per cent of GDP) this financial year.

The consolidated fiscal deficit of states is budgeted at 2.6 per cent of GDP in FY 19 to be achieved through higher revenue collection and lower revenue expenditure. States are projecting a revenue surplus of 0.2 per cent of GDP in the current year against a deficit of 0.4 per cent last year. Capital ou­tlay across states is expected to grow slower at about 14 per cent in 2018-19 as aga­inst a growth of 20 per cent a year ago.