New Delhi: Farm loan waivers in major states, the power distribution sector’s chronic losses and the banking industry’s rising non-performing assets could together derail India’s plan of bringing down general government debt to 60% of GDP by 2024-25.
Global credit rating agencies look at general government debt, which includes borrowings of both the Centre and states, while determining their sovereign rating for a country.
Agencies have, over the last year, repeatedly flagged their concerns over India’s high general government debt, saying it is unsustainable at the current level of 70% of GDP. Fiscal deficits can generally be bridged only through borrowings. So, when the fiscal deficits of states rise, they have to step up their borrowings.
In 2017-18, stung by public criticism over rising farmers suicides, as many as six states including Uttar Pradesh, Rajasthan and Punjab announced farm loan waivers, which widened their combined fiscal deficit by Rs 1.07 lakh crore, or 0.65% of GDP, as per data compiled by India Ratings and Research Private Limited, a domestic credit rating agency.
Karnataka on Thursday joined this group by announcing a debt relief package for its farmers, the second time in two years.
In his maiden budget, chief minister H.D. Kumaraswamy unveiled a Rs 34,000 crore loan waiver for the benefit of small and marginal farmers, who have been financially hit by four years of drought over the past five years.
While the farm debt waivers announced by UP and Punjab are part of their respective budgets, the waivers announced by Maharashtra, Rajasthan and Karnataka are outside their budgets, India Ratings has noted in a policy brief.
“I have decided to waive all defaulted crop loans of farmers up to December 31, 2017 in the first stage,” Kumaraswamy said in the assembly “for those farmers whose borrowings are not beyond Rs 2 lakh.” As an encouragement to the non-defaulting farmers, the government has also decided to credit the repaid loan amount or Rs 25,000 (whichever is less) directly to the accounts.
Karnataka had also announced Rs 50,000 crore loan farm loan waiver in 2017-18.
More states are likely to follow suit.
India’s general government debt, which stood at a staggeringly high level of 69.9% of GDP in 2016-17, is a sensitive point for international credit rating agencies. The government has targeted to bring it down to 64.9% by 2020-21, a plan that has gotten a stamp of approval from the IMF.
However, large fiscal deficits of states could delay the debt reduction plan. In that event, India could face rating downgrade. Rating agencies have repeatedly warned that India’s high general government debt is unsustainable and constrains its credit rating.
UDAY tumble
The combined fiscal deficit of India’s states averaged at 2.16% during FY11-FY15. However, in the last two years it has come under pressure after the Centre announced the Ujwal Discom Assurance Yojana (UDAY), a debt relief package for state-owned power distribution utilities and implemented recommendations of the Seventh Central Pay Commission.
As a result, states’ combined fiscal deficit widened to 3.07% of GDP in 2015-16 and further to 3.66% in 2016-17.
States issued UDAY bonds of Rs 98,960 crore (0.72% of GDP) in 2015-16 and of Rs 1.1 lakh crore in 2016-17. If we exclude the UDAY bonds, the combined fiscal deficit works out lower at 2.35% and 2.94% for 2015-16 and 2016-17, respectively.
The government had announced UDAY in 2015 to reduce interest burden of state-owned power distribution utilities and improve their liquidity so that they could move towards implementing the Centre’s flagship programme of 24X7 electricity supply.
Workers install new power lines on an electric pole on the outskirts of Ajmer, India, February 20, 2017. Credit: Reuters/Himanshu Sharma/Files
However, reports suggest that the UDAY scheme has failed to inculcate fiscal discipline in states and state-owned power utilities (Discoms) continue to lose money on electricity supply.
Meanwhile, Indian banking sector’s bad loan problem continues to worsen despite prodding lenders to expedite loan recovery and clean up books.
When the government announced a surprise Rs 2.11 lakh crore recapitalisation plan for public sector banks (PSBs) last October, it created hope that the industry would be soon nursed back to health and step up lending.
But the optimism has faded away after PSBs announced their financial results for 2017-18.
Thirteen PSBs have reported combined losses of over Rs 58,000 crore and their NPAs have surged nearly a fifth from end-December levels.
As much as Rs 5 lakh crore of bank loans turned into NPAs in 2017-18, taking the total slippages in the past three fiscals to Rs 13.6 lakh crore, according to a recent CRISIL (a credit rating agency) report.
About a fifth of the slippages in the last fiscal was due to withdrawal of various structuring schemes by the RBI in February 2018, after the Insolvency and Bankruptcy Code, 2016 process came into force, said CRISIL.
As a result, gross NPAs increased to Rs 10.3 lakh crore, or 11.2% of advances, as on March 31, 2018, compared with Rs 8 lakh crore, or 9.5% of advances, as on March 31, 2017, the report added.
Macro-stress tests indicate that under the baseline scenario of current macroeconomic outlook, the gross NPA ratio of scheduled commercial banks may rise from 11.6% in March 2018 to 12.2% by March 2019.
The system-level capital to risk-weighted assets ratio (CRAR) may come down from 13.5% to 12.8% during the period. Eleven public sector banks under prompt corrective action framework may experience a worsening of their gross NPA ratio from 21.0% in March 2018 to 22.3%, with six PCA PSBs likely to experience capital shortfall relative to the required minimum CRAR of 9%, said the RBI’s recent bi-annual financial stability report.
Of the Rs 2.11 lakh crore recapitalisation plan announced for state-owned banks, Rs 1.35 lakh crore will be provided by the government via bonds. This package is in addition to Rs 70,000 crore infusion plan announced by the Centre in 2015 under the Indradhanush scheme.
The Centre’s fiscal deficit slipped to 3.5% of GDP in 2017-18, against the target of 3.2%. The Centre has projected the deficit to come down to 3.3% of GDP for the current financial year, higher than the original target of 3%.
While the Centre has distanced itself from farm loan waivers announced by states, asking the latter to bear the costs, it should be noted that rating agencies consider fiscal deficit of both the Centre and states.