Echoes of China as India warned of excessive state debts
Debt owed by India’s 29 states has doubled over the past five years to $304bn, triggering calls by analysts on the central government to impose regulations or face the danger of following China down a path of over-indebtedness
India’s central government is in danger of following China down a path of failure to constrain a build-up of debt at the state level. Borrowing has spiked sharply following decentralisation measures, according to leading financial figures who urged policymakers to introduce new regulations.
The outstanding debt owed by India’s 29 states has doubled over the past five years to $304bn, or 42% of the government bond market. Individual states have gained far greater control over their finances after the central government increased the portion of tax revenues it transfers to 42%. They have also been issuing far more state bonds, known locally as state development loans (SDLs), to finance widening budget deficits.
But local economists worry India could head in the same direction as China where the central government has failed to control provinces that evaded borrowing limits by raising money off-balance sheet through local government financing vehicles. It helped push China’s debt to GDP ratio up to 268% and prompted constant concern about the state of the country’s economic health.
Where India is concerned, total debt to GDP officially peaked at 138% in 2013. But Standard Chartered’s head of South Asia economic research, Anubhuti Saha, told GlobalMarkets the central government had not aggregated figures, which would show how much borrowing was off-balance sheet.
Fiscal discipline needed
The World Bank’s South Asia economist, Martin Rama, also flagged concerns about growing off-balance sheet borrowings and contingent liabilities from states’ weak public sector enterprises.
“It’s a path we’ve seen in many developing countries,” he said. “The crises plaguing South American countries like Brazil and Argentina very much related to decentralisation measures, which made it difficult for the centre to rein in the provinces.”
Just like China, Indian bond investors are not differentiating between strong and weak provinces under the assumption they all have an implicit central government guarantee.
Saha said the market was watching to see whether the Reserve Bank of India (RBI) would do more to encourage fiscal discipline at the state level by making it less attractive for bond investors to hold their debt.
In this respect, the RBI is expected to announce changes to the risk weightings of state debt, which currently attracts the same zero weighting as central government debt.
She said the RBI could also reduce the cushion bond investors enjoy by being allowed to mark their SDL holdings to market at 25bp above government bonds.
However, State Bank of India chairman, Rajnish Kumar, said that while it might be a good idea, he did not think changing the risk weightings would make much difference and would increase borrowing costs for weaker states. He told GlobalMarkets the RBI had been “very disciplined” about managing the states’ finances. “If you look at our past history, there has been no history of defaults by individual states,” he said.