States' FY18 market borrowing to rise 22% to Rs4.5 tn

The state governments' gross market borrowings may increase by 22 per cent to Rs 4.5 trillion in the financial year 2017-18 on widening of their fiscal deficits, servicing of Uday debt and exclusion from National Small Savings Fund (NSSF), says a report. So far, in 2016-17, state governments' borrowings stood at Rs 3.2 trillion and they are likely to borrow additional Rs 0.5 trillion in the remainder period.

"The state governments' gross market borrowings to increase to Rs 4.5 trillion in FY18 from Rs 3.7 trillion in FY17 on the expectation of rising fiscal deficits led by the pay revision and servicing of the UDAY debt, a spike in debt repayment from FY18 onwards and the exclusion of most state governments from investing in the NSSF from April 1, 2016," domestic rating agency Icra's group head (corporate sector rating) Jayanta Roy said in a report today.

The rise in the borrowings of state governments would exert upward pressure on state development loan (SDL) yields in the financial year 2017-18, Roy said. Factors such as sluggish capital spending and less attractive interest rates have contributed to subdued demand from the private sector for bank credit, which may encourage banks to invest in SDLs which offer higher interest rates than the government bonds, he said.

The report, however, said the rising supply may constrain the space for the private sector to access finer-priced funds from the bond markets. It said gross market borrowing of all the state governments (including the Union Territory of Puducherry) through SDLs in the financial year 2016-17 have increased by a sharp 27.1 per cent to Rs 3.2 trillion (till February 14, 2017) from Rs 2.5 trillion in the corresponding period of the last fiscal, and already exceeded the Rs 2.9 trillion raised during April 2015-March 2016.

"This rise in SDL issuance in the current year can be attributed to various factors, including the flexibility to some state governments to borrow an additional amount of up to 0.5 per cent of gross state domestic product (GSDP), above the anchor of 3 per cent of GSDP, based on the recommendations of the Fourteenth Finance Commission," the report said.