Financial Health of States to Worsen this Fiscal: Nomura
Brokerage says fiscal deficits to rise to 3.3% of GSDP in FY17; State borrowings up 22% in FY16
Mumbai: The financial condition of state governments in India will worsen this fiscal burdened by slow tax revenue, higher salaries to state government employees due to the Sixth Pay Commission and other payments like interest on Uday bonds, Japanese brokerage Nomura Securities said in a note.
Nomura studied 16 state budgets for the last and current fiscal year. It predicts state fiscal deficits will rise to 3.3% of the gross state domestic product (GSDP) in fiscal 2017, up from 3.2% in fiscal 2016 but more importantly much higher than the 2.8% budgeted by the state government. State government borrowings have risen 22% in fiscal 2016 to .₹ 2,95,000 crore, Nomura economists Sonal Varma and Neha Saraf said in the note. Higher state borrowing from the market means state government borro- wings now stand at 33% of the total borrowings from the market, up from 12% in fiscal 2007.
The rise has been despite the central government increasing allocation from central taxes to state governments to 42% from 32% in the last one year, Nomura said.
Varma and Saraf estimate that state market borrowings will rise to .₹ 3,50,000 crore in FY17 and further to .₹ 3,90,000 crore in fiscal 2018.
“The redemption profile, UDAY-related interest burden and the implementation of the recommendations of the seventh pay commission in most states by FY18 will push state government borrowings higher in FY18,” Varma and Saraf said.
Higher borrowings from state governments will ensure that the difference between state bond yields and the 10-year benchmark central government security will remain elevated at 70 basis points. One basis point is 0.01 percentage point.