Slippages in revenue deficit targets likely

C. Shivkumar

Most of the States had expected to comply with the fiscal targets anticipating borrowings costs to remain low.

Bangalore, July 15

States are headed for fiscal deterioration this year with borrowing costs reaching close to five-year highs.

At the State Development Loan (SDL) auctions for raising Rs 1,683 crore by seven States Andhra Pradesh, Jharkhand, Madhya Pradesh, Meghalaya, Mizoram, Rajasthan and Sikkim the cut-off yields were fixed at 8.65 per cent. This rate is at least 70-80 basis points more than the yields during the auctions in May for SDLs. These borrowings were 10-year loans, about 35 basis points more than the comparative sovereign yields.

State Government officials said that with escalating debt-servicing costs, States were now likely to see slippages in revenue deficit targets for the current year.

In fact, many of the States are likely to fall short of the targets placed in their respective statutory limits imposed by the Fiscal Reforms Acts. Most of these States had expected to comply with the fiscal targets anticipating borrowings costs to remain low. In fact, all the State budgets had estimated their interest expenditure on the basis of borrowings costs in the region of about seven per cent, the sources said.

In addition to SDLs, States also raise funds from financial institutions such as the National Bank for Agriculture and Rural Development, HUDCO, public sector insurance companies and the Life Insurance Corporation of India. These institutions are now lending at rates well over nine per cent, the sources said.

Consequently, interest cost is likely to be closer to 20 per cent of the revenue receiptsunless revenue receipts also show substantial increases. But revenue receipts of many of the States are already under pressure, with the Centre leaning heavily on the States to cut back on sales tax on petroleum products so as to mitigate the impact of high international prices of crude.

This isdespite the fact that most of them have already effected debt swaps with the Centre - refinancing borrowings from the Centre, through market borrowings and small savings schemes - thereby bringing down their interest expenditure. Some of these gains achieved through these schemes are likely to be partly reversed, the officials said. The fear now is that the rates are likely to escalate further in the coming weeks, when the busy season begins.

Credit preferred

Already, there is little interest in Government debt in view of the pressure on interest margins. The preference is more for credit in view of the higher yield on assets. Credit currently generates average yields in excess of 10 per cent under the current interest rate regime.

Besides, the officials said, States are also under pressure to hike wages and pension. Both these components have dearness allowance companies that are index linked to the consumer price index. Wages and pension comprise at least 40 per cent of States' revenue expenditure.

(This article was published in the Business Line print edition dated July 16, 2006)
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