Off-balance-sheet borrowings of states are likely to have hit a decadal high, according to Crisil Ratings.
The power sector, primarily distribution companies, accounts for almost 40% of the outstanding state guarantees, Anuj Sethi, senior director at the ratings agency, was quoted as saying in the report. “These were taken to repay the dues of power generation and transmission companies with discoms continuing to make cash losses. With most of them expected to continue reporting losses this fiscal as well, due to higher coal costs, states will have to provide higher support for timely servicing of the guaranteed facilities.”
Other beneficiaries of these guarantees are state-level entities involved in irrigation infrastructure development, drinking water supply, and food and civil supplies. “Cumulatively, they are recipients of about 30% of such guarantees. However, as these entities are working to build social infrastructure and funding social welfare schemes of their governments, their own cash flows are limited.”
Cash flow support will be required for 50-55% of the outstanding guarantees, said Aditya Jhaver, director at Crisil Ratings. “4-5% of the annual revenue of states will be consumed for servicing these obligations this fiscal. This is more than double of the mark seen four-five years back and hence will partly constrain their flexibility to fund capex in the near future.”
“Fiscal prudence of the states to budget for these guaranteed obligations and allocating funds to the state-level entities in a time-bound manner will be critical,” the report said. But improvement in states’ cash flows through higher collections of goods and services tax and reduction in losses at power distribution companies through cost-reflective tariffs and enhanced commercial orientation can provide some breathing space to states.
The 11 states studied by Crisil Ratings are Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, Andhra Pradesh and Kerala.
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