States borrowed 22 off-balance sheet loans through various entities during the fiscal year, leading to a 1 percentage point increase in such hidden loans to 4.5% of the GSDP, a report said Wednesday.
Ratings agency Crisil’s report, based on an analysis of 11 sovereigns accounting for three-quarters of the GSDP, warned that this will hurt sovereigns’ much-needed capital expansion efforts as resources are expended on debt servicing.
The Indian economy has recovered to pre-COVID levels after a year of contraction in GDP due to the impact of the COVID-19 pandemic. Politicians rely on capital expansion to accelerate the revival through various measures.
The center has tried to reduce its hidden loans and paint a more truthful picture of its finances in recent years.
“These loans were taken out by entities owned by states that also guarantee the loans. About 4-5% of states’ revenue this fiscal year will go toward servicing such guarantee obligations, partially constraining state governments’ ability to fund capital expenditures,” the agency said.
It attributed this behavior by states to constrained revenue growth due to the pandemic-induced slowdown and rising revenue spending.
Both of these reasons have seen their budget deficits soar to almost 4% of GDP, well above the historical level of 2-3% recorded at the beginning of the last decade, she added.
In such a situation, states are left with a conundrum, it said, pointing out that if states wanted to borrow and pay, they would have to turn to the central government, which in turn would deal with the limits it set.
Hinting at a way out, the agency said states do not need the center’s approval to guarantee the loans and advances and borrowings issued by its facilities.
“The energy sector – primarily Discoms – accounts for almost 40% of outstanding government guarantees. These were taken to repay levies from power generation and transmission companies, with Discoms continuing to make cash losses,” said Senior Director Anuj Sethi.
With most of them expected to continue reporting losses this fiscal year, higher input costs (mainly coal) will require states to provide more support for timely maintenance of the guaranteed assets, he added.