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Feb 14, 2013, 07.19 PM IST | Source: Moneycontrol.com

Stable outlook for state governments despite slow growth

India Ratings has maintained a stable outlook on state government guaranteed debt programmes for FY14. This is despite the growth slowdown continuing in FY13, touching a decade low of 5.0%. The agency estimates growth to revive to 6.1% in FY14.

India Ratings has maintained a stable outlook on state government guaranteed debt programmes for FY14. This is despite the growth slowdown continuing in FY13, touching a decade low of 5.0%. The agency estimates growth to revive to 6.1% in FY14.

Despite the slow growth, India Ratings expects slippage in aggregate fiscal deficit of states in FY13 to be 0.3% of the gross domestic product (GDP), from the budgeted fiscal deficit of 2.1%. Unlike the earlier episode of fiscal slippage in FY09, the slippage in FY13 is expected to be low due to absence of adverse shock of salary revision.

Fiscal slippage will lead to the aggregate debt of states rising to 22.5% of GDP in FY13 from the budget estimate of 21.9%. Debt in FY14 is likely to decline to 21.7%. However, the fiscal slippage would not be significant enough to lead to debt insolvency issue. Nominal growth of economy in excess of interest rate on debt would lead to a decline in debt ratio in FY14. Fiscally better-administered states (low deficit and debt) would be able to reduce their leveraging faster than those with high deficit and leverage.

Unlike money market liquidity conditions, the liquidity of state governments has remained comfortable. However, despite comfortable liquidity conditions, tighter money market conditions have led to the spread on state government market borrowing widening to 53 bps (up to 21 January 2013) from 27 bps in FY12.

The proposed food bill of the central government is a credit positive for states. Most states provide food subsidy to targeted sections of the society from their budget also. The distribution price of grains under the proposed bill is comparable with the subsidised prices at which different state governments are distributing.

State public sector undertakings (PSUs), especially power utilities, are exerting pressure on state government finances. In FY11, while the aggregate losses of state PSUs were 0.23% of GDP, the losses of power utilities were 0.59% of GDP. Aggregate losses of state road transport corporations in FY11 were 0.08% of GDP. The dual diesel pricing would impact the state road transport corporations. If there is no commensurate increase in the passenger fare to meet the augmented cost, it would increase losses of state road transport corporations.

While the outlook on state governments is stable, loose fiscal policy in run-up to next general election (2014) and prolonged growth slowdown could change the outlook to negative. However, India Ratings attaches a low probability to either of these two events.

India Ratings has rated the government of Karnataka's guaranteed debt at 'IND AA-', the government of Andhra Pradesh's guaranteed debt at 'IND A', the government of Maharashtra's guaranteed debt at 'IND A', the government of Tamil Nadu's guaranteed debt at 'IND A', the government of Odisha's guaranteed debt at 'IND A-' and the government of Meghalaya's guaranteed debt at 'IND BBB+'.

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