Budget 2024: No Climate For Hike Of States' Borrowing Limit, Says DEA Secretary
The comment comes after many states, ahead of the budget, had sought a rise in the limit, affording them fiscal headroom.
There’s a need to “collectively move towards a more sustainable debt level," Ajay Seth, secretary of the Department of Economic Affairs, said on Thursday, implying that a higher ceiling for borrowing by states may not be possible.
The comments come after many states—ahead of the Union budget that was presented on June 23—had sought a rise in the limit, affording them fiscal headroom. The limit is currently at 3% of the gross state domestic product, with relaxations allowed for implementing reforms in the power sector or contributions under the New Pension Scheme.
“Though there are some states with a low debt-to-GSDP percentage at 20%, there are some who have (the metric at) as high as 45% of GSDP as debt, which is simply unsustainable… The ones who have a lower debt-to-GSDP ratio of 20% aren’t asking for it,” Seth told NDTV Profit in an interview. “Maybe they’re generating more revenues or managing their finances better, so there is no climate to ask for a hike (of the borrowing ceiling).”
Typically, a state’s fiscal deficit—or when expenditures overtake receipts—is financed by a combination of market borrowings, surpluses in public accounts and any off-budget borrowings.
Bid For Ratings Upgrade
In her budget speech, Finance Minister Nirmala Sitharaman reiterated the government's commitment to reduce the fiscal deficit target to below 4.5% of the GDP by FY26.
This dovetails with the requirements India must fulfil to secure a rating upgrade. Credit rating agencies consider general government debt—which includes that of the state and federal governments—while doing so.
In May, S&P Global Ratings said India's favourable GDP growth to interest rate differential has kept government borrowing sustainable, and the trend is expected to continue.
“We project the ratio of general government debt to GDP will decline to 81% by fiscal 2028, from 85% in fiscal 2024,” the ratings agency said in a report. “This is higher than the pre-pandemic debt burden of 75% of GDP, but well below the pandemic peak of greater than 90%.”
Seth said conversations with rating agencies happen regularly.
“Our attempt is to convince them (agencies) and their attempt is to convince us that their assessment of risk is appropriate to the ratings they have given,” Seth said. “...This isn’t to say there hasn’t been any recognition. A couple of agencies have changed their outlook to positive. I hope the next step will be an upgrade but even without these measures, we feel we are at that stage.”
Lower Gross Borrowings
The fiscal deficit estimates were marked down from 5.1% of the GDP to 4.9% of the GDP for FY25 in the budget speech.
Yet, borrowings are only marginally lower than in the interim budget. Gross borrowings were adjusted to Rs 14.01 lakh crore from Rs 14.13 lakh crore announced in February for FY25.
Addressing this in the post-budget press conference, it was highlighted that India’s projections for receipts from the National Small Savings Fund are expected to be at lower levels of Rs 4.20 lakh crore for the ongoing financial year, down from Rs 4.67 lakh crore in the interim budget.
NSSF comprises public investments in schemes like postal deposits, savings certificates, the public provident fund and the senior citizens' savings scheme, among others.
Seth said if small savings collections rise, the government would consider a gross borrowing cut after an assessment in December while preparing the revised estimates as in the past.
50-Year Loans
Another spending lever for capex that states can access is the 50-year loans or the special assistance to states for capital investment, which was earmarked at Rs 1.3 lakh crore in the interim budget.
When asked whether states would be able to pick up pace after a lull induced by the election and the model code of conduct, Seth said it should still be possible to absorb the outlay in the time left in the ongoing fiscal.
“But given that a significant part (of the allocation) is for ongoing projects, it should be possible to absorb it in the remaining time,” he said.
Seth said demands from states have started flowing in for allocated funds and the Department of Expenditure will spell out the incentivised activities or tied reforms by the middle of August.
