Fiscal imbalances: RBI concerned over signs of worsening state finances

The Indian Express, September 1, 2018

Reserve Bank of India (RBI) Deputy Governor B P Kanungo on Friday expressed concern over the signs of increasing fiscal imbalance in the finances of state governments.
The consolidated fiscal position of states deteriorated during 2015-16 and 2016-17. The GFD-GDP ratio in 2017-18 (RE) is at 3.1 per cent and is above the Fiscal Responsibility and Budget Management (FRBM) threshold for the third consecutive year, he said at a meeting organised by the Bengal Chamber of Commerce and Industry.
“Outstanding liabilities of State Governments have been registering double-digit growth since 2012-13 (2014-15 being an exception). State-wise data reveal that the debt-GSDP ratio increased for 16 states,” Kanungo said.
The downside risks to fiscal position of the states include stress on revenue expenditure in the run-up to the general elections, implementation of 7th pay commission recommendations by states, and farm loan waivers in certain states etc. “Fiscal slippages have also been noticed in central finances,” he said.
In response to the global financial crisis, the FRBM Act was put on hold during 2008-13 and fiscal stimuli expanded the centre’s gross fiscal deficit (GFD) to an average of 5.6 per cent of GDP during this period. During the period 2013-18, the GFD of the Centre, as a percentage of GDP averaged 3.9 per cent.
“The GFD target of 3 per cent of GDP, stipulated in FRBM Act, now stands deferred to 2020-21. In retrospect, the Central Government has achieved the target in one year only, i.e., in 2007-08 when the GFD/GDP ratio fell to 2.5 per cent,” Kanungo said. Growing fiscal imbalance, whether by the Centre or State can derail fiscal consolidation at the general government level. “General government deficit of India rules at a very elevated level amongst the G-20 countries,” he said.
Kanungo said a consequence of large expenditures and deficits is an increase in market borrowings reflecting rising trend in fiscal imbalance at States level and increase in outstanding liabilities. State Governments’ market borrowings, which is the chief source of funding of their gross fiscal deficits, have risen sharply in recent years, in contrast to the stagnation displayed by the Central Government’s dated market borrowings.
On an aggregate basis, states’ gross borrowings are budgeted to rise to Rs 5.5 lakh crore or 2.9 per cent of GDP, while net borrowings are expected to rise to Rs 4.2 lakh crore or 2.3 per cent of GDP in 2018-19. States have budgeted to finance nearly 91 per cent of their fiscal deficit through market borrowings as against around 66 per cent by the central government.

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