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Measures like farm loan waivers to increase states' fiscal deficit: India Ratings

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India Ratings and Research (Ind-Ra), a Fitch Group company, has said that it expected the aggregate fiscal deficit of states to come in higher at 3.2% in FY20 than its forecast of 2.8% in the FY19 Mid-Year Outlook, thanks to farm loan waivers and other such farm support measures.
 
Maintaining a stable outlook on the finances of Indian states for FY20, the agency said that, although the deficit was higher than the fiscally prudent level of 3% of the gross domestic product (GDP), it beleived that this would not pose a significant upside risk to states' aggregate burden in FY20.
 
"The agency expects states’ revenue account on aggregate to clock a deficit of 0.5% of GDP in FY20 due to a higher growth in revenue expenditures than revenue receipts. The competitive populism, in the nature of farm loan waivers and other financial support schemes, would take centre stage in the run-up to 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," a press release from Ind-Ra said.
 
On the expenditure side, Ind-Ra expected states’ aggregate revenue expenditure to grow 18.9% y-o-y to Rs. 33,280.90 billion in FY20 from 11.2% in FY19. 
 
"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.
 
"During periods of fiscal adjustment, capex becomes a soft target for deficit control. Ind-Ra expects states’ aggregate capex/GDP to come in marginally lower at 3.0% in FY20 from the budget estimate of 3.07% for FY19. The agency believes capex/GDP could come in below 3% for Tamil Nadu, Haryana, West Bengal and Kerala in FY20.
 
"Ind-Ra expects the aggregate debt/GDP to rise to 25.1% in FY20 from the budgeted 24.3% for FY19. The agency does not view the increase to be detrimental to states’ debt sustainability position, although states would channelise some part of borrowings towards meeting revenue expenditure. In Ind-Ra’s opinion, Madhya Pradesh, Tamil Nadu and Kerala are most susceptible to clock an increase in the debt burden in FY20.
 
"Ind-Ra estimates the gross market borrowings of states to be INR5.7 trillion in FY20. The aggregate gross market borrowings by states would be in the range of INR5.01 trillion-5.13 trillion in FY19, higher than the states’ budgeted gross market borrowings of INR4.4 trillion for FY19," the release added.
 
NNN
 

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