The Reserve Bank of India annual report on State Finance released today has said that India’s power reforms are likely to put pressure on state governments’ budgets and force them to cut spending needed to support economic growth.
The RBI said in the report that a government plan announced in November provides for states participating in the programme to convert up to 75% of the Rs 4.3 trillion loans and debt held by their Power utilities into bonds, and assume all interest payments and redemptions.
It said such a process would considerably reduce the fiscal space of states, which might lead to curtailment of capital expenditure with an adverse impact on growth.
It said that Indian States could find themselves deviating from the path of fiscal consolidation as they take on an additional interest burden from debt tied to state utilities. It also stated that the Ujwal DISCOM Assurance Yojana (UDAY) would shrink Banks’ credit book by 1-7%.Around 30% of state public enterprises making losses.
In the report the Apex Bank also urged the states to cut unproductive expenditure and boost non-tax revenues to improve the quality of fiscal consolidation.
The report also stated that the estimated combined fiscal deficit of states would fall to 2.4% of gross domestic product (GDP) in the financial year ending in March 2016 from 2.9% the year before. However, it forecast a sharp cut in the small savings rate announced by the government would increase states’ market borrowing.
