Farm support measures to push states’ fiscal deficit to 3.2%: India Ratings

Loan waiver and other support measures for farmers are expected to raise the aggregate fiscal deficit of states to 3.2 per cent in the current fiscal i.e. 2018-19, a research agency said here on Monday.

India Ratings, a Fitch Group company, in its latest report on States’ Finances said the aggregate fiscal deficit is expected to increase by 40 basis points (100 basis points or bps equal to 1 per cent) in FY 20 (2019-20) from 2.8 per cent in 2018-19 (FY19). “The competitive populism in the nature of farm loan waivers and other financial support schemes would take centre stage in the run-up to the next general elections in May 2019. A larger impact is expected on fiscal and revenue deficit to gross state domestic product ratios for Madhya Pradesh, Kerala and Rajasthan, among non-special category states, in FY20,” it said.

The agency expects states’ revenue account on aggregate to clock a deficit of 0.5 per cent of GDP in FY20 due to higher growth in revenue expenditure than in revenue receipts. On the expenditure side, it estimated states’ aggregate revenue expenditure to grow 18.9 per cent to Rs 33,280.90 billion in the current fiscal from 11.2 per cent during the last fiscal.

The announcement of farm loan waivers by the governments of Madhya Pradesh, Chhattisgarh, Assam and Rajasthan in December 2018 extends the list of states that have resorted to this mechanism to address farmers’ distress. Additionally, Odisha and Jharkhand announced schemes to provide financial assistance to small and marginal farmers along the lines of the Rythu Bandhu Scheme implemented in Telangana.

As more funds will be required to support measures for the farm sector, the agency expects capital expenditure (capex) or expenditure on growth to be affected as states would like to go for ‘deficit control.’ It estimates that aggregate capex, as a percentage of GDP, would come in marginally lower at 3.0 per cent during the current fiscal, from the Budget estimate of 3.07 per cent in FY19. The agency believes capex could come in below 3 per cent for Tamil Nadu, Haryana, West Bengal and Kerala in FY20.

Higher expenditure is likely to push the aggregate debt to GDP ratio, which is estimated at 25.1 per cent during the current fiscal, as against a Budget estimate of 24.3 per cent during the last fiscal. The agency does not view the increase to be detrimental to the states’ debt sustainability position, although states would channelise some part of the borrowings towards meeting revenue expenditure. In its opinion, Madhya Pradesh, Tamil Nadu and Kerala are most susceptible to clock an increase in the debt burden in FY20. The agency estimates the gross market borrowings of states to be Rs 5.7 trillion in FY20.

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