Market borrowings of state governments may rise by 22% in FY2018: ICRA
Factors such as sluggish capital spending and less attractive interest rates have contributed to subdued demand from the private sector for bank credit, says ICRA.
By Anandi Chandrashekhar, ET Bureau | Updated:
MUMBAI: ICRA estimates the total market borrowings of the state governments to rise from Rs. 3.7 trillion in FY2017 to Rs. 4.5 trillion in FY2018.
“The rise in borrowings of state governments would exert an upward pressure on SDL yields in FY2018,” said Jayanta Roy, Group Head - Corporate Sector Rating, ICRA.
He 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 that offer higher interest rates than the Government of India securities (G-sec). “However, the rising supply may constrain the space for the private sector to access finer-priced funds from the bond markets,” he added.
According to the ICRA report, the rise in SDL issuance in the current year can be due to the flexibility to some state governments to borrow an additional amount of up to 0.5% of gross state domestic product above the anchor of 3.0% of GSDP, based on the recommendations of the Fourteenth Finance Commission. It said most state governments have also been excluded from financing their fiscal deficits from the NSSF from the current fiscal, boosting their reliance on the bond markets.
The report said various factors, including pay revision and servicing of UDAY bonds, are expected to increase the combined fiscal deficit of the states in absolute terms in FY2018. If the states’ net borrowings remain unchanged at 2.2% of GDP, and assuming that the nominal GDP grows by 11.2% in FY2018, it expects the net borrowings of the state governments to rise to Rs. 3.8 trillion in that year from Rs. 3.4 trillion in FY2017.
“The rise in borrowings of state governments would exert an upward pressure on SDL yields in FY2018,” said Jayanta Roy, Group Head - Corporate Sector Rating, ICRA.
He 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 that offer higher interest rates than the Government of India securities (G-sec). “However, the rising supply may constrain the space for the private sector to access finer-priced funds from the bond markets,” he added.
According to the ICRA report, the rise in SDL issuance in the current year can be due to the flexibility to some state governments to borrow an additional amount of up to 0.5% of gross state domestic product above the anchor of 3.0% of GSDP, based on the recommendations of the Fourteenth Finance Commission. It said most state governments have also been excluded from financing their fiscal deficits from the NSSF from the current fiscal, boosting their reliance on the bond markets.
The report said various factors, including pay revision and servicing of UDAY bonds, are expected to increase the combined fiscal deficit of the states in absolute terms in FY2018. If the states’ net borrowings remain unchanged at 2.2% of GDP, and assuming that the nominal GDP grows by 11.2% in FY2018, it expects the net borrowings of the state governments to rise to Rs. 3.8 trillion in that year from Rs. 3.4 trillion in FY2017.
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