India's government will let states borrow an additional 210 billion rupees ($4.3 billion) extra in 2009/10 to battle a slowdown and drought, a move analysts said would add to pressure on the budget and bonds. Thursday's move could push the combined federal and state deficit towards 10.8 percent of gross domestic product, its highest level in three decades, if states borrow the extra funds.
The federal government has little room to fund more stimulus spending itself after last month forecasting a budget deficit of 6.8 percent of GDP and record gross market borrowing of 4.51 trillion rupees in 2009/10 (April/March). "This will go in a long way in reversing the impact of economic slowdown and accelerate the growth revival in the medium term," Information and Broadcasting Minister Ambika Soni said.
The increase in the states' borrowing limit for the current fiscal year to 4 percent of their GDP from 3.5 percent follows a similar increase from 3 percent in 2008/09 to meet stimulus spending needs after the global credit crisis and economic downturn hit India harder than expected.
Weak monsoon rains have raised the prospect of a drought, which could threaten signs of economic improvement in the first half of 2009. India's economy expanded 6.7 percent in 2008/09, slowing sharply from 9 percent or more in the previous three fiscal years, and growth is expected at around 6 percent in 2009/10.
Analysts said the extra borrowing would increase bond supplies, adding to the upward pressure on yields. "It will have an effect on state loan spreads. So spread of state loans over G-Secs (government bonds) might go up," said A. Prasanna, an analyst with ICICI Securities Primary Dealership. States meet about 80 percent of their deficits through market borrowing, data showed.