Bengal to Rajasthan: It's crunch time for states' finances as economy slows

Outstanding debt of states has risen over the last five years to 25% of GDP, posing medium-term challenges to its sustainability.

India’s sharp slowdown is endangering the fiscal deficit targets of its states, threatening to unravel progress made over the past few years and driving borrowing costs higher for some of them.

The states have budgeted a consolidated fiscal deficit target of 2.6% of gross domestic product in the financial year ending March, a recent study by the Reserve Bank of India shows. While the deficit ratio has remained within the mandated threshold of 3% of GDP in the previous two years, doubts are growing about their ability to meet the latest goal.

Any slippage could see India’s overall public finances come under pressure and raise the risk of a downgrade by rating companies. Only last month, Moody’s Investors Service cut the nation’s credit rating outlook to negative, citing a litany of problems from a worsening shadow banking crunch and a prolonged slowdown in the economy to rising public debt.

Outstanding debt of states has risen over the last five years to 25% of GDP, posing medium-term challenges to its sustainability, according to the RBI study. India’s gross general government debt—including federal and states’ borrowings—stood at 69% of GDP, higher than China’s 55.6%, according to the International Monetary Fund.

That spells bad news for states’ borrowing costs. The yield on 10-year bonds sold by West Bengal, which has one of the lowest deficit ratios among India’s 28 states, rose to 7.29% in December from 7.06% in July, data compiled by Bloomberg News show. That’s still lower than the 8.21% at the beginning of the year, as yields tracked the RBI’s aggressive interest rate cuts.

Despite attractive yields on states’ debt that carry an implicit sovereign guarantee, there’s little interest from global funds -- which have used only 2.2% of the 612-billion rupee ($8.6 billion) investment limit available to them in such notes. Part of the reason, according to fund managers, is a lack of price differentiation between the better-run and poorer states

Business Standard