States have done off-balance-sheet borrowings through various entities in FY22, resulting in a 1 percentage point increase in such hidden loans to 4.5% of GSDP, a report said on Wednesday.
The report by ratings agency Crisil, based on an analysis of 11 States accounting for three-quarters of GSDP, warned that this will impact the badly-needed capital-expansion measures by the States as resources will be ploughed to service debt.
The Indian economy has revived to touch the pre-COVID levels after one year of a decline in the GDP due to the impact of the COVID-19 pandemic. Policymakers are betting on capital expansion to accelerate the revival through various measures.
The Centre has been trying to decrease its hidden borrowings and show a truer picture of the finances for the last few years.
“These borrowings have been raised by entities owned by States, which also guarantee the loans. Around 4-5% of the revenue of States will go towards servicing such guarantee obligations this fiscal, partially reducing the ability of State governments to fund capital expenditure,” the agency said.
It attributed this behaviour by the States to constrained revenue growth due to the pandemic-induced slowdown, and increasing revenue expenditure.
These two reasons have led to their fiscal deficits rising to close to 4% of GSDP, well above the historical level of 2-3% seen earlier in the last decade, it added.
Stuck in such a situation, States face a conundrum, it said, pointing out that if States want to borrow and pay, they will have to approach the Central government which will, in turn, look at the limits it has set.
Hinting at a way out, the agency said the States do not require the Centre’s consent to guarantee the loans and advances, and bonds issued by its entities.
“The power sector — primarily discoms — account for almost 40% of the outstanding State guarantees. These were taken to repay the dues of power generation and transmission companies with discoms continuing to make cash losses,” its senior director Anuj Sethi said.
With most of them expected to continue reporting losses this fiscal as well, due to higher input (mainly coal) costs, States will have to provide higher support for timely servicing of the guaranteed facilities, he added.