While New Delhi has slowly wrestled its fiscal deficit to 3.5 percent of GDP from 5 percent a few years ago, the deficits are actually widening at the state level — leaving India’s financial position essentially unchanged from 2012, before Indian Prime Minister Narendra Modi even took power.
What is more, the problem is likely to get worse as populist farm waivers and other spending sprees pick up ahead of the general election in 2019.
“There’s definitely reason to be concerned over the way things are going,” says Shilan Shah, a Singapore-based India economist for Capital Economics, who tackled the subject in a recent note.
Photo: EPA
CROWDING OUT
It means borrowing costs for Indian companies could rise as state-owned banks are forced to buy state-issued bonds, “crowding out” companies hoping to raise debt.
That could hit already-anemic private sector investment, which has been holding back faster GDP growth and prevented India from generating the millions of jobs needed to meaningfully employ its young population.
Photo: AFP
It also means India may not get a ratings upgrade that could improve global investor confidence.
In the past, India’s top officials have complained about ratings agencies keeping India at their lowest investment grade, saying they have “inconsistent standards” for assessing Asia’s third-largest economy.
REFORM
More broadly, it means Modi’s reform agenda at the center is being undermined by the country’s various states, Shah said.
However, Modi and his Bharatiya Janata Party (BJP) are not entirely without blame.
In the euphoria following the BJP’s election victory in India’s most populous state, Uttar Pradesh, the new state government — run by a Hindu priest — eagerly turned on the money taps for a huge loan waiver for the state’s farmers.
That has set off a domino effect as the waiver puts pressure on other other Indian states. The BJP-led Maharashtra, Karnataka and Punjab state governments have announced loan waivers. Farmers in Gujarat, Madhya Pradesh, Haryana and Tamil Nadu are asking for waivers that would cost many hundreds of billions of rupees more.
DEFICITS
To give a sense of scale, the Uttar Pradesh waiver is to cost 2.6 percent of the state’s GDP — and the government is already running a 3 percent deficit.
In Maharashtra, the state’s 2.7 percent deficit will be hit by a US$5.2 billion waiver affecting nearly 9 million farmers.
Reserve Bank of India Governor Urjit Patel has said that writing off loans for millions of farmers encourages others not to repay and risks pushing up inflation.
Fitch Ratings has already said that waivers will lead to “further fiscal slippage,” adding that the last widespread waiver program for 43 million farmers in 2008 cost about 1.3 percent of GDP.
CLSA India Pvt has predicted the loans could swell to US$30 billion over five years.
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