DNA Money Edit: Poor health of state economies to hurt fiscal deficit

Dwindling state exchequers is compounding the fiscal deficit woes of the central government. Oxford Economics said in a note that state finances pose a risk to India, which already boasts the second-largest Budget deficit among major economies. Lower-than-expected revenues from the goods and services tax (GST), and farm loan waivers announced by various state governments are adding salt to the wound. Oxford has warned that this could eventually raise concerns about debt sustainability.

In the past few weeks, the spread between the 10-year benchmark bond and the average cut-off yield on state government bonds at auction has widened to more than 60 basis points from around 55 bps in the middle of February. Though state governments are aiming to narrow their deficits to 2.7% of GDP in the current fiscal, it may turn out to be an over-ambitious plan.

For instance, Maharashtra, which announced a major farm loan waiver, is likely to grow slower compared to last year when it posted 9.4% growth. The dip in the agriculture production due to less-than-normal rainfall, hailstorm and unseasonal rains apart from the slump in the real estate and construction sector may have impacted the state significantly. States such as Rajasthan, Tamil Nadu, UP, Kerala and Punjab are struggling with lower growth rates, with their fiscal deficits overshooting the 3% target.