State govts at fis­cal risk over medium term, warns RBI

Farm-loan waivers, pay panel pay­outs, high level of guar­an­tees may up debt bur­den

The Hindu Business Line - - FRONT PAGE - OUR BU­REAUS

The Re­serve Bank of In­dia has warned that State gov­ern­ments are likely to face sev­eral chal­lenges to their fi­nances dur­ing 2017-18 due to farm-loan waivers, ex­pected im­ple­men­ta­tion of the rec­om­men­da­tions of their Pay Com­mis­sions, high level of guar­an­tees given by them, and ris­ing in­ter­est li­a­bil­i­ties on ac­count of re­struc­tur­ing of state-run power util­i­ties.

In its an­nual re­port for 2016-17, the RBI ob­served that the an­nounce­ment of farm-loan waivers by four State gov­ern­ments (so far in 2017-18) and the po­ten­tial an­nounce­ment by sev­eral oth­ers pose a ma­jor fis­cal risk over the medium term. “Be­sides im­pact­ing credit dis­ci­pline, vi­ti­at­ing credit cul­ture and dis-in­cen­tivis­ing bor­row­ers from re­pay­ment, they may have a desta­bil­is­ing im­pact on yields of State devel­op­ment loans, thereby pos­ing a higher in­ter­est bur­den for the States in fu­ture,” the re­port said.

“Con­comi­tantly, ratchet ef­fects can firm up the gen­eral level of in­ter­est rates and crowd out pri­vate bor­row­ers,” it added.

The re­port ob­served that the com­mit­ted li­a­bil­i­ties of States may in­crease in case they de­cide to im­ple­ment the rec­om­men­da­tions of their Pay Com­mis­sions in 2017-18.

The high level of State gov­ern­ment guar­an­tees con­sti­tutes a ma­jor fis­cal risk, it added. The in­ter­est li­a­bil­i­ties of States that have par­tic­i­pated in fi­nan­cial re­struc­tur­ing of state-run dis­tri­bu­tion com­pa­nies through Ujwal Dis­com As­sur­ance Yo­jana would in­crease in the years ahead.

The cen­tral bank also hinted at the pos­si­bil­ity that many States (par­tic­u­larly the fis­cally pru­dent ones) may step up bor­row­ings, given the flex­i­bil­ity pro­vided by the Four­teenth Fi­nance Com­mis­sion. “Thus, even as the Cen­tral gov­ern­ment makes... ef­forts to­ward fis­cal con­sol­i­da­tion, the higher debt bur­den of the States could push up gen­eral gov­ern­ment debt,” the re­port said.

Keep­ing in view the rec­om­men­da­tion of the Fis­cal Re­spon­si­bil­ity and Bud­get Man­age­ment Re­view Com­mit­tee of a sus­tain­able debt path, the RBI said States too will need to tread the fis­cal path with cau­tion.

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