Mumbai: Pay revisions, interest payments and farm loan waivers are stressing state government finances yet again, the Reserve Bank of India (RBI) said in a report.

States have budgeted a gross fiscal deficit (GFD) of 2.6% of gross domestic product (GDP) during FY19, with 11 states budgeting above 3%, RBI said in its annual report titled State Finances: A Study of Budgets. The revised estimate for GFD-GDP for FY18 stood at 3.1%.

For FY19, states have projected a revenue surplus of 0.2% of GDP against a deficit of 0.4% as per the revised estimates of FY18. Total debt waivers were budgeted at 0.2% of GDP during FY19 compared with 0.32% of GDP in FY18 as per revised estimates.

“With states continuing announcements and roll-out of farm loan waivers, the budgeted GFD could be at risk, and the additional borrowing requirement could produce a concomitant impact on the already elevated borrowing yields," said the report.

The central bank also said fiscal risks are likely in 10 states going for elections during this year.

A possible fiscal slippage could result in higher market borrowing.

According to the report, the share of market borrowing by states in financing gross fiscal deficit is projected to increase to 91% during FY19 from 74.9% in FY18.

“Given debt sustainability concerns associated with rising market borrowings, improved efficiency of expenditures and fiscal marksmanship may be necessary to sustain growth while maintaining fiscal prudence."

Of the total gross fiscal deficit slippage of 35 basis points (bps) in FY18, an impact of 27 bps was felt on account of the revenue shortfall due to the implementation of the goods and services tax (GST).

“The decline in states’ tax revenues is essentially associated with the pending accounting issues related to GST implementation," the report said.

However, RBI executive director Michael Patra, in his foreword, said that as GST stabilizes, it should boost states’ revenue capacity and support fiscal consolidation.

Farm loan waivers contributed to one-third of the overall slippage worries, with a 0.05% slippage of the overall 0.13% on revenue expenditure, the report added.

Fiscal 2018 is the third consecutive year, wherein states have failed to meet their gross fiscal deficit (GFD) target, the central bank said, adding that this comes despite expectations of an improvement on higher devolution from the centre.

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